Leidos Holdings, Inc.

Greetings. Welcome to the Leidos Second Quarter 2022 Earnings 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 from your telephone keypad. Please note that today's conference is being recorded. At this time, I'll now turn the conference over to Stuart Davis, Senior Vice President, Investor Relations. Mr. Davis, you may begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter fiscal year 2022 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 supplemental financial 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'll 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 Crone, who will begin on slide four.

Thank you, Stuart, and thank you all for joining us this morning. Leidos remains on track for another year of solid organic growth and core business profitability. The affirmation of our Defense Enclave Services Contract Award by the Government Accountability Office demonstrates our leadership in digital modernization across the federal government with strong demand for our technology solutions and services across our diversified business portfolio. We continue to execute on our disciplined and balanced capital allocation strategy to drive shareholder value. And we are proving our ability to compete successfully for talent with another quarter of robust hiring. I'll now expand on these four points. Number one, our financial performance for the quarter was strong ahead of consensus at both the top and bottom lines. Revenues of 3.6 billion were up 4.3% in total and up 4% organically year over year. Non-GAAP diluted EPS for the quarter was also up 5% to $1.59 with an adjusted EBITDA margin of 10.2%. We also generated $40 million of cash flow from operations and are on track to generate at least $1 billion of operating cash flow this year. Number two, our business development results demonstrate our strong positioning in the government technology marketplace. we achieved net bookings of $2.2 billion in the quarter, representing a book-to-bill ratio of 0.6. Over the past 12 months, net bookings are $15.4 billion, and book-to-bill is 1.1. Total backlog at the end of the quarter stood at $34.7 billion, which was up 4% year over year, with funded backlog at $7.5 billion, up 5%. On a constant currency basis, backlog was $268 million higher. You can read about some of our awards in the press release, but let me highlight a few developments in the quarter. Most importantly, the GAO affirmed the $11.4 billion DES award to Leidos. will support DISA's mission by consolidating enterprise IT services at a global scale and by providing standardized, responsive, and cost-effective solutions. This program should have a several-year-one way of growing revenue and expanding profitability, but will not add materially to the 2022 revenue or earnings. We also had an outstanding outcome on our Social Security Administration position. The SSA re-competed all of the work under its primary IT services IDIQ known as ITSSC2 in two task orders, and we significantly expanded our role. We were the sole large business awardee on both task orders. On the first, we'll modernize and manage the SSA's IT infrastructure including data center, data operations, networks, telecommunications, cloud, and user services. And all of this is new work for us. On the second, we'll now perform all of the software development and mission application work that we previously split with other providers. As expected, both of the awards were protested last week. But should we prevail, we could double our revenue at SSA and make ITSSC2 a top 10 program. Finally, we've seen some initial indications of an improving airport screening landscape. We were selected by the Dominican Republic's Punta Cana International Airport to upgrade both people and baggage screening at all security lanes within the Terminal B checkpoint. In addition, bid volume and bid scale has increased meaningfully when compared to the first half of 2021, and we're getting great feedback on our ability to differentiate our offerings by bringing broader Leidos capabilities like cyber protection. Although we're not expecting a full recovery in the airport screening business until 2024, It's good to see some positive trends here. That said, the overall bookings environment has been challenging as procurement timelines continue to extend. DoD outlays, for example, are down 2% this government fiscal year to date compared to fiscal year 21, despite a higher budget. Still, our book-to-bill ratio understates the true strength of the business development performance in the quarter, as it includes nothing for DES and the protested SSA awards. Our win rates and submit volumes remain high, and we expect procurements will pick up to match the improved budget environment. Number three, our approach to capital allocation is a core part of our investment thesis. We've talked about being appropriately levered and maintaining our investment-grade rating, returning a quarterly dividend, reinvesting for growth both organically and inorganically, and returning excess cash to shareholders in a tax-efficient manner. And we're doing all of that. In Q1, we executed a $500 million accelerated share repurchase, and we've just entered into a definitive agreement to acquire Cobham Aviation Services, Australia's aviation special mission business, for about 215 million U.S. The transaction is subject to regulatory approval and other customary closing conditions, and we expect to close by the end of the year. We expect the acquisition to be immediately accretive to non-GAAP EPS. The business owns and operates 14 modified aircraft, providing border force airborne surveillance and maritime safety search and rescue to the Australian federal government are a critical element of Australia's national security. This acquisition diversifies our Australian portfolio into capability and mission services work with both the defense maritime and homeland affairs programs. Finally, Integration risk is manageable because airborne surveillance is what we know how to do well, and we already have strong local leadership and infrastructure to support success. Number four, Leidos is an attractive destination for talented people. In the second quarter, we hired nearly 3,600 people, a number we've only surpassed once in five years, and that's when we were simultaneously staffing the Navy NGEN program and the Military Family Life Counseling program. Year to date, we've hired more than 6,200 people. Quarter after quarter, we've demonstrated that talent acquisition is a core light of strength. On the Q1 call, we talked about challenges around retention. Competition for talent remains high, as critical skills for us, such as software engineers and developers, are in demand by both tech and non-tech companies. Even though voluntary attrition seems to have peaked, we remain focused on keeping engaged with our people. In fact, our June leadership offsite was focused on retention, and we're now implementing many of the ideas that came out of that session. Before turning it over to Chris, let me touch on the federal budget landscape. The House and Senate Armed Services Committees approved versions of the fiscal year 23 National Defense Authorization Act, both of which recommended healthy increases to the President's request. Congress fully recognizes the urgency of investing in our national security in the face of global security threats. The physical year 23 appropriations process is also underway, which should result in significant nominal increases to 2022 levels. But we expect that the government will begin the physical year with a continuing resolution that should be resolved before the end of the 116th Congress. And finally, I'm pleased to announce that we'll be hosting an investor site visit at Dynetics in Huntsville, Alabama this fall. Dynetics is an important part of our value proposition for investors and a key differentiator for us in the marketplace. The event will start with a dinner with the leadership team on November 30th with a mix of briefings, tours of the production facilities, and Q&A with the team on December 1st. Expect to come away with a much better understanding of the culture and key growth drivers for Dynetics, including the hypersonics, indirect fires protection capability, and space-based missile defense programs. Please reach out to Stuart if you're interested in attending. I'll now turn the call over to Chris.