Leidos Holdings, Inc.

Greetings and welcome to the Lighthouse Quarter 3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-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. It is now my pleasure to introduce your host, Stuart Davis, Senior Vice President, Investor Relations. Thank you, sir. You may begin.

Thank you, Maria. And good morning, everyone. I'd like to welcome you to our third quarter fiscal year 2022 earnings conference call. Joining me today are Roger Crone, 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. Our third quarter results demonstrate the momentum in our business as we continue to report revenue growth at the upper end of our guidance across our diversified portfolio. In addition, our dedicated team delivered earnings in excess of our forecast and generated the highest quarterly cash flow from operations in our history. These results position us well to deliver on our full-year financial targets as we make the world safer, healthier, and more efficient. As usual, I'll touch on our financial performance, capital allocation, business development performance, and people. First, our financial performance for the quarter was strong and ahead of consensus at both the top and bottom lines. Record revenue of $3.61 billion were up 4% year over year. Adjusted EBITDA margin of 10.3% was up 10 basis points sequentially, and non-GAAP diluted EPS came in above our forecast and consensus. Our third quarter performance and improved visibility enables us to raise our revenue outlook and de-risk our earnings for the full year. We also generated a record $748 million of cash flow from operations. This puts us on track to meet our cash commitment for the year, strengthens our balance sheet, and positions us for future capital deployments to benefit shareholders. Which brings me to point number two, our approach to capital allocation. Yesterday, we closed our acquisition of Cobham Aviation Services, Australia's aviation special mission unit. This business provides border force airborne surveillance and marine safety search and rescue and generates roughly 100 million U.S. in annual revenues. It is immediately accretive to both non-GAAP EPS and EBITDA margin. At this point in our strategic journey, the Cobham acquisition is a great example of what we're looking for. It expands market access, provides us franchise programs with a customer of strategic importance, and complements our existing business, all at a multiple below ours and a price that enables our shareholders to benefit from future revenue and cost synergies. Our cash balance at the end of the quarter was $807 million, as collections were especially strong in the back half of September, the close of the government fiscal year. Our plan is not to accumulate cash. We just paid for the Cobham acquisition and we'll be paying down some debt to move closer to our target leverage ratio of three times. Our balance sheet enables us to steadily deploy capital in productive ways. Given the strength of the company, an evaluation that doesn't reflect our long history of driving steady earnings growth and cash generation will lean towards share repurchase when we have deployable capital. Number three, our business development results demonstrate that our strong positioning in the government technology marketplace is enabling us to navigate a difficult environment. Procurement timelines continue to extend and DOD outlays continue to lag budget authority. With net bookings of $4.1 billion in the quarter, we achieved a book-to-bill ratio of 1.1 and grew backlog to 35 billion or 35.4 billion on a constant currency basis. We also had nearly a billion dollars of third quarter awards protested. Absence the protests, book-to-bill would have been 1.4. Highlighting some important awards, We received a five-year, $1.5 billion task order to support the DoD with rapid technology insertion to enhance C5ISR missions globally. We expect to receive the full award value over the life of the contract, but in accordance with our policy, we only booked 100 million in the quarter. This award, known as Sentinel, is all about getting capabilities into theater and to the combatant commanders quickly. As a solution agnostic integrator, part of our role is to find innovative technologies that can be rapidly matured, proven, and integrated in support of multi-domain operations. Sentinel fits within the Joint All-Domain Command and Control or JADC2 umbrella. Our positioning on JADC-2 was also bolstered by the Air Force's selection of the Advanced Battle Management System Digital Infrastructure Consortium. With four other consortium members, Leidos will work to deliver the Air Force's vision for distributed battle management and decision advantage by enabling speed, security, and integration at scale. NAVSEA awarded Leidos a $358 million contract to design and build a medium-sized unmanned undersea vehicle to provide autonomous oceanographic sensing and data collection for operational intelligence as well as to support mine countermeasures. We also received our first task order on the $11.5 billion defense enclave services contract. The $138 million task order will lay the framework and begin to consolidate, integrate, and optimize five agencies on a common network architecture through digital modernization and transformation. We successfully completed the transition period and have assumed operational responsibility for DoD Net and DISA Net. And in a key win for our space business within Dynetics, we received a subcontract with Northrop Grumman to develop hypersonic defense sensors for the Space Development Agency. We have more than 40 years of experience developing and flying space-based electro-optical and infrared sensors and payloads for a variety of missions. Through this award, will develop and build the sensor payload for a proliferated constellation of low Earth orbit satellites for the Tranche 1 tracking layer. The tracking layer constellation will detect and track advanced hypersonic and ballistic missile threats as part of SDA's missile defense architecture. On the predecessor contract, our Tranche 0 payload is on schedule to launch by the end of the year. the Tranche 1 design will increase coverage area while reducing payload size, weight, and power. Eventually, these constellations of satellites will form the core of a new national defense space architecture, providing global coverage and adding resiliency in the country's missile warning arena. As a reminder, we'll be hosting an investor site visit at Dynetics in Huntsville, Alabama on December 1st. Please reach out to Stuart if you're interested in attending. And the final key win that I'll touch on this morning is the re-award of our IT support to the Social Security Administration. As of the second quarter call, our award was protested by the previous incumbent. And after a resubmission of proposals, the SSA re-awarded all of the work to Leidos. The incumbent once again protested the award, and the new GAO review period expires on January 3rd. And lastly, point number four. Leidos is an attractive destination for great talent. In the third quarter, we hired just over 2,800 people, and year to date, we've hired more than 9,000 people and increased headcount by more than 2,000. It's still early, but voluntary attrition is trending in the right direction, and we don't expect that staffing will significantly constrain our plans for next year. Our dedicated and capable people are a key differentiator for us and an important national asset. Before turning it over to Chris, let me touch on the federal budget landscape. As expected, the federal government is operating under a continuing resolution at last year's funding levels until December 16th. Congress is still working on the appropriations and authorization bills for government fiscal year 2023. Nothing will get voted on until after the November 8th elections, but we expect that robust budgets will get passed before the end of the calendar year. Outlays are beginning to improve, which bodes well for future growth.