Leidos Holdings, Inc.

Greetings. Welcome to the Leidos fourth quarter 2022 earnings call. At this time, all participants will be 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 this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis with Investor Relations. Mr. Davis, you may now begin.

Thank you, Rob. And good morning, everyone. I'd like to welcome you to our fourth quarter and 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're using today. 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, 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, let me turn the call over to Roger Crone, who will begin on slide four.

Roger Crone Thank you, Stuart, and thank you all for joining us this morning. Oh, and by the way, happy Valentine's Day. The fourth quarter marked a strong finish to a banner year for Leidos, with record revenue and non-GAAP diluted EPS driving us to the top end of our revenue guidance range and beyond our EPS guidance range for the year. our performance validated that our diversified and resilient portfolio and our investments in technology and innovation are positioning us for growth in key customer missions, including digital modernization, cyber, hypersonics, and force protection. Each and every day, our 45,000 people are helping our customers execute on important missions and meet the world's most complex challenges. Against a challenging backdrop in 2022, we delivered on our financial commitments, allocated capital to deliver value for our shareholders, won multiple franchise programs that position us for future growth, and significantly grew our talent base. So let me provide more detail on each of these points. Number one. Our strong financial performance in the fourth quarter enabled us to deliver on our financial commitments. Record revenue of 3.7 billion for the quarter and 14.4 billion for the year were up 6% and 5% respectively. Adjusted EBITDA margin of 10.7% in the quarter was up 40 basis points year over year which helped drive adjusted non-GAAP diluted EPS to a record $1.83, which represents growth of 17%. For the year, adjusted EBITDA margin of 10.4% helped lead to non-GAAP diluted EPS of $6.60, which was well above our guidance. We generated $105 million of cash flow from operations in the quarter and free cash flow of $52 million. For the year, that translates to nearly a billion of cash flow from operations and $857 million in free cash flow, which were right at guided levels. These results came despite multiple headwinds, most notably a protracted continuing resolution to start the year, inflation, supply chain disruptions, and labor constraints. Even at industry-leading scale, we're nimble enough to pivot as needed, and I'm proud of how well the team pulled together and weathered these challenges. Number two, in 2022, we allocated capital to deliver value for our shareholders. Over the year, capital deployment was heavily weighted towards return to shareholders. while still layering in strategic acquisition of the Australian airborne business and investing to grow our core business through capital expenditures and internal R&D. With our asset-light model, CapEx was just under 1% of revenues, with large investments in airborne ISR and Dynetics And we're seeing those investments pay off in additional aircraft performing valuable missions and key wins in hypersonics. Which takes me to number three, business development. This year, we won franchise programs in each segment that position us for growth. Programs like DES in defense, Social Security Administration IT in health, and AGES in civil contributed to performance in 2022 and have built the foundation for 2023 and beyond. They demonstrate our ability to take away work and target brand new opportunities. In the fourth quarter, which is typically the weakest in our industry, we booked 3.7 billion of net awards for a book to bill ratio of 1.0. For the year, our book-to-bill ratio was 1.1. Total backlog at the end of the quarter stood at $35.8 billion, of which a record $8.4 billion was funded. Total backlog is up 4%, and funded backlog is up 13% year over year. After a relatively slow start to the year across the industry, contract activity is improving. Most importantly, our submit volume picked up dramatically in the fourth quarter with $23 billion in submits, of which 92% was for new business. Taken together, The two Social Security Administration IT task orders that we spoke of last call were the largest award in the quarter. GAO dismissed the competitors' protest earlier than expected, and that program has fully ramped. We also won more than half a billion dollars in hypersonics award, including Mayhem, our first major contract on the air breathing side, and Wide Field of View Tranche 1, which is the backbone of the nation's hypersonics defense capability. We're pleased that so many of you were able to join us in Huntsville last December to get a clear picture of the opportunities that we see at Dynetics. Our independent research and development investments were critical to procuring these awards, just as they were for our landmark wins in digital modernization. In 2022, we invested $116 million in IR&D, and IRAD has grown at a compound annual rate of 23% over the last five years. We continually invest to develop proprietary tools and unique processes to drive competitive advantage. We've already deployed workflow transformations using the latest generation of AI based on large language models. And we're at the leading edge of combining artificial intelligence and cyber to enable our customers to achieve security levels that are beyond compliance. Speaking of cyber, earlier this month, we announced the latest version of our zero trust readiness level tool suite that simplifies zero trust adoption for government organizations, consolidating a six to nine month planning process to less than 60 days. We drive digital innovations by working tightly with our product partners. For example, we've partnered with Intel Corp to demonstrate confidential computing through a hardware-based, independently attested, trusted execution environment. And just last month, we were recognized as the 2023 ServiceNow America's Premier Partner of the Year. Number four, we significantly grew our talent base. We hired more than 2,400 people in the fourth quarter and more than 11,000 in 2022. Hedge count was up 6% for the year and attrition rates continued to subside. We've seen great synergy between our people engagement and technology investment initiatives. Employees in our technical upskilling programs have significantly higher retention, and we more than doubled participation in 2022 compared to 2021. Our technical upskilling programs are aligned with our technology strategy, and broad participation is enabling us to enhance our competitive position and deepen our culture of innovation. If you want to build your technical skills over a fulfilling career, Leidos is a great place to work. In 2022, we offered courses in artificial intelligence and machine learning, software, cyber, cloud, and digital engineering. In 2023, we're expanding with new offerings in cyber operations, secure rapid software development, and specialized learning paths in AIML. We also take learning and engagement beyond the classroom. Two weeks from now, we'll launch our seventh annual AIpalooza Challenge, where employees around the company will engage with some of the newest AIML techniques in a creative and collaborative competition. Perpetual learning is part of our culture, and we make it fun. Before turning it over to Chris, I'll touch on the current budget environment. Demand trends are very positive for our business. Late last year, Congress overwhelmingly passed and the President signed the Omnibus Appropriations Bill, funding the government through September. Budgets across the board saw healthy increases, including defense spending, which was up about 10%. The budget addressed the critical challenges we're facing as a nation, including national security concerns arising from China and Russia. And Leidos is well positioned to respond. Amidst a highly partisan backdrop, President Biden's calls in the State of Union address to support Ukraine, protect our country, and modernize our military to safeguard stability and deter aggression received strong bipartisan support. That said, We're anticipating a series of noisy debates over the coming months around the debt ceiling and the 2024 appropriations, given the razor-thin majorities and the deep divisions in Congress. As a matter of prudence, we're preparing contingency plans around a potential government shutdown. But we built our 2023 guidance, assuming a continuing resolution beginning in October and extending through the rest of the year with no government shutdown. We believe this is the most likely outcome. In summary, I'm pleased with the performance and the momentum of the company. In the fourth quarter, we posted record levels of revenue, non-gap diluted EPS, and funded backlog, as well as the highest adjusted EBITDA and adjusted EBITDA margin and lowest attrition rate for the year. We anticipate that 2023 will be another good year for Leidos, marked by strong hiring, important new wins, solid growth in revenue and operating income. With that, I'll turn the call over to Chris for more details on our results and our 2023 outlook.