Leidos Holdings, Inc.

Greetings. Welcome to the Leidos first quarter 2023 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis, Senior Vice President of Investor Relations. Mr. Davis, you may begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our first quarter fiscal year 2023 earnings conference call. Joining me today are Roger Crone, our 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 first quarter results demonstrate our ability to drive strong organic growth as record revenue performance was consistent with our long-term target. We expect earnings and cash performance to build momentum as we progress through the year and are fully committed to achieving our 2023 guidance. As I step down as CEO, I am confident that Leidos is truly the leader in our industry with unmatched talent, technical depth, and market-facing solutions. Our dedicated team is at the forefront of our customers' most challenging missions 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. Number one, our top line financial performance for the quarter was excellent. Record revenues of $3.7 billion were up 6% in total and over 5% organically year over year. Our growth is in line with our long-term model, and we continue to take share from our competitors. All three of our segments grew, led by civil and health, which speaks to the power of our diversified portfolio. Bottom line performance was lower than anticipated, largely driven by delays in security product deliveries and continue investment in the security product offerings. The delays, based primarily on supply chain issues and customer site readiness, are fundamentally a matter of timing and will be resolved within the year. The strength that we're seeing across the Leidos portfolio, especially in the health business, will help to accelerate margin and earnings performance throughout the year. As planned, cash generation was decreased by the cash tax payments for Section 174 expense for 2022 and the final payment on the CARES Act deferral. Absent those unusual items, cash flow from operations was consistent with last year's levels. we remain on track to generate more than $700 million of operating cash flow this year. Which brings me to point number two on capital allocation. Our long-term balanced capital deployment strategy has always consisted of being appropriately levered and maintaining our investment grade rating, returning a quarterly dividend to our shareholders, reinvesting for growth both organically and inorganically and returning excess cash to shareholders in a tax-efficient manner. We've committed to take down our gross leverage ratio to three times and we expect to achieve that by the end of the year. In the first quarter, we refinanced and extended our debt to position us to deploy capital in productive ways. we view our strong balance sheet and investment grade rating as a strategic asset in the current market. The cash tax payments and upcoming debt pay down limited our ability to deploy capital in the quarter, but we resolutely believe that our current valuation is not aligned with our fundamental earnings power and cash generation. Therefore, we bought back $25 million of shares through open market repurchases in the first quarter. As we ramp free cash generation in the second half of the year, we'll create flexibility to allocate capital to benefit long-term shareholders. Number three, business development. Most importantly, award activity is returning to normal levels after a protracted period marked by procurement delays and obligations under running budget authority. A more active environment bodes well for Leidos with our long history of being able to thrive in a competitive market. In the quarter, we exceeded our gross awards plan and booked a net of $3 billion in awards for a net book-to-bill ratio of 0.8. Total backlog at the end of the quarter stood at $35.1 billion. Of that, $8.3 billion was funded, which is up 17%. You can read about some of the key awards from the quarter in the press release, but we're particularly pleased to see the intelligence community customers making awards again. Maritime continues as a focus item for us, and international airport security is beginning to rebound. To ensure that we bring true differentiation to our bids, we continue to invest in strategic technologies that are core to our business. Last quarter, I talked about cyber, zero trust, confidential compute, and generative AI. We also have a rich history of delivering secure software at speed to support critical missions. We protect the software supply chain from development to deployment to operations, delivering software security that goes beyond compliance for customers like the FAA, DOD, and DHS. And we're investing in cutting-edge emerging quantum technologies focused on applications such as quantum augmented communications and the transition to quantum resilient cybersecurity. We see tremendous opportunities ahead. We have $30 billion in submits awaiting adjudication, and we expect to submit another $39 billion over the remainder of the year. Based on the successful Tranche Zero launches in April, and the rapid tranche one timeline, the Space Development Agency is accelerating the wide field of view program, so tranche two should be a 2023 submit. We also expect expanded follow-on bids on our force protection and hypersonics programs this year. In addition, we're pursuing large supply chain modernization efforts for the Army and the Veterans Administration and digital transformation remains a key priority for our customers. And lastly, point number four, Leidos continues to be an attractive destination for talented people. In the first quarter, we hired more than 2,500 people and increased headcount 7% year over year. Even more important, voluntary attrition has dropped down to pre-pandemic levels. This improved labor position provides potential uplift to our revenue plan. We're benefiting from the improved labor market for technical talent, but we believe our focus on employee engagement and career development is also a major positive factor. Our managers are living their commitments to Leidos Life by putting their employees' careers, flexibility, and well-being first. They are connecting with their teams and taking the time to engage with their employees around building a career. In our recently completed employee engagement survey, we were above external benchmarks across almost all categories scoring particularly strong on manager relationships, inclusion and diversity, and employee growth and development. If you want to join an inclusive team and build your skills over a fulfilling career, Leidos is a great place to work. Before turning it over to Chris, I'll touch on the current federal budget environment. The U.S. Congress is currently debating President Biden's $6.9 trillion budget request for physical year 2024. The proposed budget includes increases in critical areas that are important to Leidos, such as defense, transportation, veterans affairs, NASA, and energy. Last week, House Republicans passed a bill that would raise the debt ceiling and cap discretionary spending. The bill will not pass the Senate, but discussions can now begin in earnest towards resolving the debt ceiling and the government fiscal year 2024 budget, given the enormous challenges that we have as a nation. Finally, I want to speak to the CEO transition. As I look back on my nine years at Leidos, I am proud to say that we have achieved incredible transformation and growth together, almost tripling revenues and establishing ourselves as a premier broad technology provider. Our strong leadership team helped us win numerous large competitive programs in the US and abroad. We completed transformational acquisitions, including integrating Lockheed Martin's information systems and global solutions business, which enabled us to expand our capabilities and better serve our customers. Our growth, our efforts have not gone unnoticed as we have been recognized as a leader in our industry, providing innovative solutions to complex challenges. Our commitment to our employees has been a top priority, and we have fostered a culture of innovation, engagement, and inclusion. We have built a team that is passionate about our mission, vision, and values and conveys that commitment to our customers. Throughout the COVID-19 pandemic, we took care of each individual and prioritized safety and well-being above all. Our focus on collaboration, innovation and inclusion has allowed us to create a culture that enables each employee to grow and thrive, driving our success. We have also made a significant impact on our customers and communities. We have transformed logistics for the UK Ministry of Defense, enabling them to rapidly respond to the crisis in Ukraine. We have driven IT innovation throughout government and helped more than 200 utilities across the U.S. build a more resilient, reliable, and sustainable electric grid. We have modernized healthcare information management across the Department of Defense on cost and on schedule and enabled our veterans to get the disability benefits they have earned through their service. And we have worked in our communities to confront opioid addiction and remove stigmas associated with mental health challenges, making a positive difference in the lives of many. The driving force behind our company's prosperity is undoubtedly the exceptional talent of our employees and the unwavering strength of our leadership team. Without their incredible contributions, we would not be where we are today. I am confident with this team in place, Leidos is posed for continued growth in the future. As I transition out of my CEO role, I'm excited to welcome Tom Bell to the position. I have worked with Tom over the past month and I am convinced he is the right person to lead this company into the future. With a great foundation in place at Leidos, I believe that Tom's tenure will be rewarding for our employees, customers, suppliers, and shareholders. I will end by saying thank you. to each of you for your confidence you've showed in me during my tenure. It has been an honor of a lifetime. Thank you.