Leidos [LDOS] Conference call transcript for 2022 q1
2022-05-03 13:05:26
Fiscal: 2022 q1
Operator: Greetings. Welcome to Leidos’ First Quarter 2022 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 today should require Operator assistance during the conference, [Operator instructions]. Please note, this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis, Senior Vice President, Investor Relations. Stuart, you may now begin.
Stuart Davis: Thank you, Rob. And good morning, everyone. I'd like to welcome you to our first quarter fiscal year 2022 earnings conference call. Joining me today are Roger Krone, 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 will also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to Slide 2 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 3, 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 Krone, who will begin on Slide 4.
Roger Krone: Thank you, Stuart and thank you all for joining us this morning. Our first quarter marked a strong start to 2022 with record levels of revenue, backlog and backlog standing from our leadership position in the government technology market. We continue to build our reputation and track record of performance in digital technology, cyber and innovation -- innovative systems across our diversified, resilient business portfolio. Our strong first quarter results and the improving federal budget picture increase our confidence in delivering on our full year financial commitments. I'll organize my remarks around four messages. 1. Our financial results demonstrate our ability to meet our commitments and outperform the market. 2. Our Business Development results, are a testament to our differentiated position in the market. 3. Our consistent capital allocation approach drives shareholder value, and 4. We are able to attract the workforce we need and develop them for long-term success. 1. Our financial performance was strong at both the top and bottom lines. Revenues of $3.49 billion were up 5.4% in total and up 4.4% organically year-over-year, which is once again towards the top of the market. Non-GAAP diluted EPS for the quarter was a $1.58 with an adjusted EBITDA margin of 10.2%. All three metrics were ahead of our plan for the quarter. Finally, we generated $93 million of cash flow from operations and free cash flow of $65 million. We remain on track to generate more than a billion dollars of operating cash flow this year. Number 2, Business Development sustained the momentum that drove our industry-leading organic growth last year, we achieved net bookings of $5.4 billion in the quarter, representing a book-to-bill ratio of 1.6. As a result, total backlog at the end of the quarter stood at a record $36.3 billion, which was up 11.6% year-over-year. The awards in the quarter were rich and new business and takeaways balanced across our three segments and constant -- and concentrated in key capability areas, including digital transformation and cyber. In civil, two large awards successfully completed lengthy protests. We won that $2.5 billion 10-year advanced enterprise Global Information Technology Solutions. We're agents program, where we will provide communication, data center cloud and cybersecurity services across all of NASA centers and facilities. For the FAA, we'll continue our more than 20 years of support on the national aerospace systems integration support contract. The new NISSC contract is a single award IDIQ with a $1.7 billion ceiling across 10 years. Our working conferences, strategic and transition planning, flight procedures, security, and safety, data analytics and unmanned aircraft systems in support of air traffic control, modernization efforts. In Health, we won two multiple award IDIQs totaling about $1.7 billion over six and a half years to provide disability examinations for the veterans benefits administration. The first was a re-compete for pre -discharge exams in the United States, and the second is a new area for us, exams outside the United States. Although we'll have more competition within our legacy business, we're excited about the opportunity to expand internationally. In Defense Solutions, our Gibbs and Cox subsidiary won a $319 million five-year award for ship design engineering services for the U.S. Navy's future service combatant program. We won two new cyber programs totaling $340 million, focusing on Agile Secure DevOps, cyber inspection and assessment, continuous monitoring, and audit and security management services. We also had a takeaway win on a $100 million single-award IDIQ to modernize the Army's gunnery training simulation systems. This work serves to enhance readiness across the operational spectrum in support of national defense. And the biggest, most impactful win for the quarter is not included in our bookings. We were awarded the $11.5 billion Defense Enclave Services contract by the Defense Information Systems Agency. The DES contract is a 10-year digital modernization program focused on consolidating common IT services into a single-service provider framework. As expected, this award is now in protest with a GAO schedule to decide in mid June. One of the keys to our BD success is our strategic partnerships, including with Amazon Web Services. I am proud that Leidos was awarded the AWS 2021 public sector consulting partner of the year. AWS recognized Leidos with this honor because of our deep technical partnerships in areas such as edge to cloud and next-generation digital infrastructures to build solutions that drive digital and cloud transformation. This recognition illustrates the value of the Leidos Alliance Partner Network, which we founded in 2018, to deepen relationships with the most important vendor partners across our business groups. This network has fostered greater collaboration with partners to drive technology innovations and continues to be a differentiator for Leidos on a wide range of proposals and programs. Number 3, I view capital allocation as one of the keys to creating shareholder value. Last quarter, we talked about a greater focus in 2022 on share repurchase. And we followed through with a $500 million accelerated share repurchase. We set near our target leverage ratio and our ability to generate cash gives us significant firepower for further capital deployment. We're well-positioned to grow and will continue to look for technology add - ons and strategic initiatives, that bring us differentiated capabilities for customer access. We'll pursue large M&A only for a company that truly accelerates our strategy. 4. People are at the heart of what we do. And this quarter, we hired more than 2,600 people. One reason people are attracted to Leidos is, that we enable our employees to build successful careers. We regularly review talent and plan development actions at all levels of the company. This quarter, we made several key moves at the Executive Leadership team and Board levels. We're pleased to welcome our new Chief Human Resources Officer, Maureen Watterson, who brings an impressive background and skill set to the Leidos team. Her excitement and commitment will enhance our people experience here at Leidos with about 1,600 funded vacancies and an industry-wide shortage of cleared technical talent, recruiting and retention remains areas of strategic focus. Maureen, will lead our human capital strategy and continue shaping the employee journey at Leidos through our Leidos Life Initiative. Dave King has decided to step back from his role, as Dynetics Group President. He will continue in a consulting capacity, ensuring a smooth change to new leadership and advising on matters of strategic importance. I want to thank Dave for his outstanding contributions thus far, and I look forward to working with him in his new capacity. Dave's Deputy Steve Cook is stepping up as Dynetics Group President. Steve's extensive experience and background, both with Dynetics for 13 years and leading critical programs for NASA before that, have prepared him well for his new role. He'll team with Paul Angola as his deputy. In addition, Paul will lead the national security space business for Leidos with a focus on space surveillance, missile warning, and space situation awareness. Next, our digital modernization business is growing rapidly with an expanding portfolio of differentiated technology. To meet the demands of our growing business, Steve Hall (ph) will move from his role as CIO to lead the enterprise and cyber solutions operation within the defense group. We've moved our CIO team under Chief Technology Officer, Jim Carlini, to tightly align our technology and CIO capabilities. Finally, Pat Shanahan (ph) has joined our Board of Directors. He served at the highest levels of government, including Deputy Secretary Defense, and acting Secretary Defense and industry, including more than 30 years with Boeing, where he led supply chain and operations, commercial airplane programs, and many other relevant areas. While at DOD, he was a passionate champion of digital and technological advancement for the department, driving modernization in cyber security, AI, and cloud computing, as well as command, control, and communication. Pat, wealth of expertise offers tremendous benefits for our shareholders and customers. Before turning the call over to Chris, I'd like to address the current congressional budget environment. Since the Q4 call, Congress passed the fiscal year 2022 omnibus spending package funding the federal government through the remainder of the fiscal year, with $782 billion in defense spending of 5.6 increase from fiscal year '21 and $730 billion in non-defense spending, a 6.7 increase from fiscal year '21. The budget also includes $14 billion in emergency supplemental spending in support of Ukraine given the devastation at the hands of the Russians. It will take time for the new budgets to work their way individual programs and new opportunities. But this provides positive momentum for the back half of 2022 and into 2023, President Biden has also released his $5.8 trillion fiscal year 2023 budget request. This request includes $813 billion in defense spending and $769 billion in non-defense spending. In addition to kicking off the fiscal year '23 congressional budget process, Congress remains focused on finalizing a $10 billion bipartisan COVID-19 relief measures. And passing legislation to increase American competitiveness with China. Congress also continues to grapple with rising inflation rates, strained energy markets, supply chain issues, and the conflict in Ukraine. In closing, our thoughts are with the people of Ukraine and our colleagues who have family and friends in the country. The United Nations estimates that more than 11 million people are displaced. To help those impacted, we've made a significant donation to project hope to mobilize emergency teams and send medical supplies. The people of Ukraine have lost infrastructure that will take lifetimes to replace. When the war ends, it will only be the beginning of their struggle. I will now turn the call over to Chris Cage.
Christopher Cage: Thanks, Roger. And thanks to everyone for joining us today. As Roger said, Q1 was an outstanding quarter across the board, and I'm proud of the team for delivering such strong operating performance. Let's jump right into the first quarter results, beginning with the income statement on Slide 5. Revenues for the quarter were $3.49 billion, up 5.4% compared to the prior-year quarter. Revenues grew organically across all three reportable segments, given robust hiring and high labor utilization. Adjusted EBITDA was $358 million for the first quarter, which was down 8% year-over-year, and adjusted EBITDA margin decreased from 11.7% to 10.2% over the same period. Adjusted EBITDA was down primarily as a result of the $26 million net benefit related to the Mission Support Alliance joint venture recorded in the first quarter of fiscal year 2021, as well as a return to more normative indirect spending levels as we move past the pandemic. Non-GAAP net income was $223 million for the first quarter, which was down 10.4% year-over-year and non-GAAP diluted EPS for the quarter was $1.58, down 8.6% compared to the first quarter of fiscal year 2021. Interest expense was up $3 million year-over-year with the additional borrowing to fund the Gibbs & Cox acquisition and the $500 million accelerated share repurchase. The Non-GAAP estimated tax rate was 21.2%, which was in line with our expectations for the quarter, but below the projected 23% for the year. The weighted average diluted share count for the quarter was 140 million shares compared to 144 million in the prior-year quarter. Now, for an overview of our segment results in key drivers on Slide 6. Defense Solutions revenues increased by 4.6% compared to the prior-year quarter. The largest growth drivers were the engine and if pick ramps, which more than offset the completion of the human landing system-based contract within Dynetics and the end of our Afghan support contracts. Defense Solutions, Non-GAAP operating margin for the quarter came in at 8.1%, which was down compared to the prior year quarter, as the result of higher investments on developmental programs. Civil revenues increased 3.8% compared to the prior year quarter. The revenue increase was primarily driven by volume growth on existing programs, including the support to Hanford and the FAA, as well as our engineering support to commercial energy providers. Civil, Non-GAAP operating income margin was 7.7% compared to 12% in the prior-year quarter. The decline in segment profitability was primarily attributable to the MSA gain in the prior period, as well as the write-down taken on a minority interest joint venture program. Health revenues increased by 10% compared to the prior-year quarter. We continue to benefit from the ramp on the Military and Family Life Counseling program and dim sum had a large year-over-year increase based on deployment timing. Health non-GAAP operating income margin was 19.2% compared to 18.6% in the prior year quarter. The improvement in segment profitability was primarily attributable to efficiencies introduced into procurement and delivery on certain contracts. As we've discussed previously, we expect Health segment margins to land in the mid-teens for the year. Turning now to cash flow and the balance sheet on Slide 7. Operating cash flow for the quarter was $93 million and free cash flow, which is net of capital expenditures, was $65 million. During the first quarter, we returned $577 million to shareholders, principally through the $500 million accelerated share repurchase program that we put in place two days after our February earnings call. We were immediately able to retire 4.5 million shares. The program will end within the next two weeks, and if our share price remains relatively constant, we'll retire another few hundred thousand shares at that time. We're funding the ASR with a combination of cash on-hand and proceeds from the issuance of commercial paper. When the Russians invaded Ukraine, the CP market became more volatile so we sold some accounts receivable for short-term liquidity. Since then, CP markets have cleared and we've exited the AR monetization by quarter-end, so there was no impact on cash flow for the quarter. At quarter-end, we still had about $75 million of borrowings outstanding through our commercial paper program. As of April first 2022, we had $297 million in cash and cash equivalents and $5.1 billion of debt. We remain committed to a target leverage ratio of three times, our long-term balanced capital deployment strategy remains the same and consists 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. On now, to the forward outlook, as shown on Slide 8, we are maintaining our guidance for fiscal year 2022. Specifically, we expect revenues between $13.9 billion and $14.3 billion adjusted EBITDA margins between 10.3 and 10.5% non-GAAP diluted earnings per share between $6.10 and $6.50 and cash from operations of $1 billion or greater. With three quarters to go, we believe the current ranges still encompass the likely outcomes for the year. That said, I will offer a few comments to help with modeling. On last quarter's call, I mentioned a range of EPS benefits from share repurchases. When we were implementing the plan, our stock was trading in the mid '80s. We're now forecasting a volume weighted average share price of around $105. In addition, with world events, interest rates have risen and liquidity has tightened, which has increased borrowing costs. Given these factors, we are now projecting the addition from the Q1 ASR program to be closer to $0.10 than $0.20. In addition, we see the current environment is favorable towards growth, and we're exploring multiple opportunities where prudent investments could pay long-term benefits to Leidos and our shareholders. These increased investments may come in Business Development, R&D, and program execution. Finally, as Roger mentioned, we remain on track to generate a billion dollars of operating cash flow. As is our usual pattern, we expect the lion's share of operating cash flow will be generated in the back half of the year. We still believe that Congress will retroactively delay implementation of the new tax research costs, capitalization rules, given the number of members from both parties who have cosigned legislation to restore pro innovation tax policy before the end of the year. However, if we were to amortize research costs and pay the taxes currently required, our operating cash flow target will be lower by approximately a $150 million. With that, I'll turn the call over to Rob so we can take some questions.
Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. One moment, please, while we poll for questions. [Operator Instructions]. Thank you. Thank you. Our first question will be coming from the line of Peter Arment with Baird. Please proceed with your question.
Operator: Thank you. Our next question is coming from the line of Sheila Kahyaoglu (ph) with Jefferies. Proceed with your questions.
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Operator: Thank you. The next question is from the line of Colin Canfield with Barclays, please proceed with your questions.
Operator: Yes. That question is coming from the line of Mariana Perez Mora of Bank of America.
Operator: Thank you. At this time, I'll turn the floor back over to Stuart Davis for closing remarks.
Stuart Davis: Thank you, Rob, for your assistance on this morning's call and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.
Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
