Greetings. Welcome to the Leidos Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I’ll turn the conference over to Peter Berl, Senior Vice President, Investor Relations. Mr. Berl, you may begin.

Thank you, Rob, and good morning, everyone. I’d like to welcome you to our fourth quarter 2020 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer and other members of the Leidos management team. Today, we will discuss our results for the quarter ending January 1st, 2021. Roger will lead off the call with notable highlights from the quarter, as well as comments on the market environment and our Company's strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. After these remarks from Roger and Jim, we’ll open the call for your questions. 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, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in the press release that we issued this morning, it is also available in the presentation slides. The press release and presentation as well as supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com. With that, I’ll turn the call over to Roger Krone.

Thank you. Peter, and thank you all for joining us this morning for our fourth quarter and full year 2020 earnings conference call. Before we closed the door on last year, I'd like to take a moment to thank the approximately 39,000 Leidos employees, our business partners and our customers for their unwavering commitment and collaboration in light of the COVID challenges. I'm inspired by what we accomplished in the past year together, and the challenges that we will solve in this New Year for the betterment of our communities and our customers mission. Fourth quarter results reflect the resilience of our growing portfolio with new record levels of revenue and backlog coupled with margin expansion and further balance sheet optimization. This performance positions us for above market growth in 2021, fueled by our talented, diverse workforce who continue to engineer and deliver technologically innovative and secure solutions for our customers evolving needs. Revenues for the quarter were $3.25 billion, up 10.1% from the prior year, reflecting two strategic acquisitions that closed in 2020. Q4s adjusted EBITDA of 11.3%, up 30 basis points compared to the prior year period reflects strong program performance and indirect cost management that delivered 8% growth on non-GAAP EPS totaling $1.63 for the quarter. Net bookings of $3.3 billion in the quarter resulted in a book-to-bill slightly above one and 1.4 times on a trailing 12 month basis. These solid results do not reflect any material contributions from the Navy Next Gen program, which was resolved in Leidos’s favor late in the year, the $1.7 billion FAA NISC IV re-compete award that is currently under protest or the $1 billion Military and Family Life Counseling award that was announced in January. These three wins, coupled with a backlog that is more than 2.5 times our…

Thanks, Roger, and thanks to everyone for joining us today. I'll start by providing an overview of our 2020 results for both the fourth quarter and full year, followed by a review of 2021 guidance. First, starting with revenue, fourth quarter revenue grew 10.1% over the prior year period, driven by the acquisitions of Dynetics and the Security Detection and Automation businesses, partially offset by 2019, 53-week year, which included a couple of additional business days in its final month. On an organic basis, we experienced contraction of approximately 3% due to the continuation of some COVID-19 impacts, as well as the timing of customer procurements and delayed new starts, which more than offset new program wins and on-contract growth in parts of the portfolio. Our organic growth calculation excludes the performance of acquired businesses until a full year has passed. More details can be found on slide 16 of the earnings presentation, which is available on our Investor Relations website. Full year revenue of $12.3 billion was at the lower end of our guidance range due to one, better than expected indirect cost savings that translated into lower revenue on cost reimbursable programs, two, the favorable decision on the NAVY Next Gen award, which occurred later in the quarter than previously estimated and three, timing on new contract awards and on-contract – on-contract gross decisions attributable to the ongoing effects of COVID. We expect a number of these events to become tailwind for 2021. Fourth quarter adjusted EBITDA margins were a 11.3%, 30 basis points higher than the prior year period. Our robust margins this quarter were driven by higher margins on new programs and favorable write-ups on existing programs due to strong program performance and reduced indirect rates. We delivered full year adjusted EBITDA margins of 10.8% matching…

Thank you. We'll now be conducting the question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Joseph DeNardi with Stifel. Please proceed with your questions.

Thanks. Good morning.

Hey, good morning.

Jim. Just – good morning. Just so we can have an idea in terms of the SD&A business and kind of how levered that is to recovery and commercial, you know, air passenger volumes, I mean, how much of the $500 million that you're expecting from that business was kind of service-related versus more hardware? And maybe what's your assumption for that contribution from the business to 2021?

Well, that that business, you know, we don't guide by division, Joe. But what I would say is that, the bulk of what you're seeing, and what we talked about is - its roughly, half of it is driven by reduction in product sales, where customers have deferred making orders or receipt of orders, and then roughly half of it is driven in lower services. And the reason for lower services is that with a lot of lanes closed, there's less machines that require surface, obviously, and customers are looking for ways to reduce their outlays on that, as a lot of this is funded by customer passenger fees, and that kind of thing.

Okay. That's helpful. And then Roger, I want to ask this question in a way that maybe you can answer it. But there was a proxy filed on Friday that suggested a company of your size made an all stock offer, albeit at a lower price, and were perspective [ph] ended up. I am wondering if you could just talk about your willingness to use, you know, a meaningful amount of equity for M&A. Just kind of the overall philosophy at this point on larger M&A? Thank you.

Yeah. Hey, thanks, Joe. Of course, you know, we don't comment on deals that don't close and deals that may be in process or may not be. And what we have always said is, we want to be smart in the market. And we want to have dialogue with all of our competitors and potential partners. And so we have a great relationship with the leaders in all the companies in our market space, and we often have discussions. But on any particular deal or at any particular time, I have absolutely no comment. We like our size and scale. We've said that in the past. We are really excited about the scope, acquisitions that we have made in the last now two years. And you know, they've significantly added to our capability. But we have told you all and the street is that we believe we have a responsibility to look at everything and provide some insight into what's going on in the marketplace, to with our management team and our board. And so we will take a look at everything. But you should look at the deals that close.

Okay, great. Thank you.

Our next question is from the line of Seth Seifman with JPMorgan. Please proceed with your questions.

Thanks very much, and good morning. I was wondering, I guess in terms of, you know, where sales came in this quarter, you raise the sales guidance by $100 million at the last earnings and kind of just kind of bumped up against the bottom of the range. In the quarter you talked a little bit about timing of procurement and delayed new starts during the prepared remarks. I guess maybe can you elaborate on that a little bit more, where that stuff came up the most? And how you see it kind of breaking loose over the next few quarters?

Yeah. Seth, let me start and talk about the programs and then Jim can touch on numbers if he would like. When we raised our guidance, we had Navy Next Gen, it was in the Court of Federal Claims. And we - Court of Federal Claims is a little bit unpredictable. Unlike the GAO process, which has a rigorous calendar and is kind of a 99-day thing. And it was our best estimate that the Court of Federal Claims would rule, frankly, before the Thanksgiving holiday. And at one time, we thought it would actually happen in the second week of November. That did not happen. We didn't get a ruling out of the Court of Federal Claims until December. So that delayed the start up of the Next Gen program, buy at least a month, maybe more. And then the other thing that happened with this third wave of COVID, which, you know, I think COVID is very difficult to predict. Our indirect costs went down even further, as we went back to mandatory telework. And we saw our overhead and G&A costs go down even further than we had anticipated, and because about half of our portfolio is a cost type contracts, when we see a reduction in cost, it pulls revenue down with it. And those were the two major drivers. Maybe I'll turn it over to Jim, if he wants to add some more color.

Sure. Yeah. And if you want to think about the delta between kind of the midpoint of our prior guide, and where we ended up, it's roughly four things there equally spread, think of a quarter of it being lower volumes than we had previously forecasted, in the Medical Exam business, we thought the recovery would be a little bit bigger there is the indirect rate issue, the indirect cost issue that Roger just alluded to. Then there was about a quarter [ph] of it was COVID-19 impacts in the Civil group. And then the rest of it, about a quarter of it was just the delays in the program start-ups for NGEN, and some other contract wins.

Okay, okay. Thanks. That's helpful. Okay, and then so, like when we see in the press release, you guys talk about the COVID impact. Is there - is what's called out in the item in the press release. Is that - was that more than $12 million on the top line?

I'm not sure I understand your question Seth, could you restate I maybe?

Oh, yeah. Just like - I think in the in the release, it talks about for the quarter and fiscal year 2020 COVID adversely impacted revenues by $12 million. So is that kind of what you're referring to in terms of the COVID impacts on you know, versus what you expected? Or is there - is that sort of, you know, just an actual year-on-year decline due to COVID. And then there were other things that were supposed to happen that didn't?

Yeah. Well, you know, what you see us talking about during, you know, when we discussed our results a few minutes ago is the year-over-year declines relative to COVID.

Okay.

What we - when we talked about the number versus what we had previously forecast, obviously, that's going to be different. So you've got two components, one the year-over-year delta, but there's also the amount of business growth that we expected, that got impacted by COVID-19 as well.

Okay, great. I’ll pass it on. Thank you.

All right. Thank you, Seth.

The next question is coming from the line of David Strauss with Barclays. Please proceed with your questions.

Thanks. Good morning.

Good morning, David.

Morning. NGEN, can you give us an idea, when you talked about the program ramping up to $600 million plus on an annual basis? Can you talk about, you know, what you have baked into that - into your rising 10% revenue, organic revenue growth guides for this year in terms of that program ramping up?

You mean for the guide that we had for 2020 or 2021?

For ‘21? So in other words, how fully ramps do you expect NGEN to be in that 2021 guide? And how much - you know, how much should we have the benefit as you fully ramp in ’22?

The ramp in NGEN revenue for 2021, we expect it to be ramping up, it will be about 2 to 2.5 points of organic growth for the year. So you can think of that as being somewhere in the $250 million to $300 million range.

Yeah, and just to give you the programmatics, take about 3000 people, about half Leidos employees and we have a transition period, as you're doing these programs, we're in the transition period. So we really haven't started the employee ramp up, that will begin in earnest, really in the second half of the year. And we will be close to fully ramped by the end of the year, but there will still be significant growth in ‘22. So you might expect another two to three points of growth from NGEN in ‘22, as well.

Okay. That's helpful. Thanks. And Roger, you talked about, your view on what happens with the Defense budget from here. Given some of the acquisitions on the Defense side of things, how would you characterize your exposure at this point, just looking at your Defense business to, you know, the operations and maintenance portion of the budget, as opposed to modernization?

You know, what, obviously, we've been doing even within our Defense group is trying to adjust our portfolio. So we're strong in the areas that we see growing. And the 1901 Group is really moving to as a service platform. And we've seen, even in the $1.9 trillion, the Biden administration has set aside some dollars for IT. So we continue to see IT modernization is a great place to be. We see modernization of what we would call newer technology platforms, you know, hypersonics, unmanned vehicles, I mean, and that's really what is got us excited about the one - the deal that we announced today. But you know, we always have a mix, and we've got some programs, that where we support operations, we still have people deployed, although is less than 1% of the business. Our philosophy has always been to try to balance. And again, we stay away from the large marquee platforms in the three services. You know, think of that is, you know, tanks and trucks and airplanes, and big, big surface ships and undersea ships, we tend to be what we think are the smaller, more agile, more responsive capabilities that our customers have.

Okay. Thank you very much.

Yeah.

Our next question comes from the line of Greg Konrad with Jefferies. Please proceed with your questions.

Good morning.

Good morning, Greg.

Just transferring from Defense to NASA, you know, under the new administration, maybe there is some changes, or at least a pause, where they kind of figure out the path forward. Can you maybe talk a little bit about the NASA opportunity, particularly at Dynetics, and maybe any expectations around that business?

Well, I mean, I think we're like everyone else. We're waiting for a NASA administrator to be announced. We're enthusiastic about comments that the administration has made about the space program and about technology. And the decision to keep the space council, which we think is a leading indicator. The space programs, both the military and NASA have always been a source of innovation. And needless to say, I think all of us were glued to the television over the last couple of days, and watch the perseverance rover land on Mars, and the excitement that it brought the country. So we're still very enthusiastic about our position with NASA, which is in Dynetics, but I would remind everyone on the call is that we have a significant NASA presence that existed before Dynetics. A lot of people don't know, we've always made the food that goes into space out of the National Food Lab at Johnson Space Center. Specifically about the Lander program, which is I think, where you'd like me to focus, we are at the end of what we call the base phase contract, where we have done a preliminary design on our Lander configuration. We have received a two-month extension from the customer, as they will [ph] about their competitive evaluation of the three bidders. And then we expect that they will make an award relatively on time, either in March or April, and that they will move forward with a Lander development program, consistent with the budget that NASA has remaining in 2021, and then whatever the Biden administration does for 2022.

Thank you. That's helpful. And then just a follow up to - one of the last questions around kind of the breakout of the impact to revenues in Q4. I know you don't necessarily provide quarterly guidance. I mean, some of those headwinds are probably lifted, some of them maybe continued through 2021. When you think about organic growth throughout 2021, I mean, is it more level loaded? Or should we see some acceleration as stuff like NGEN ramps up in the back half of the year? And maybe some of the COVID impacts, you know, become a little bit less?

Yeah. It's a great question. We definitely see the growth being more backend loaded. As we see some of these recent contract wins. And the resolution of the protests, give us the opportunity to begin ramping, you know, now in the first quarter, but it really isn't until Q3 and Q4, you're going to see the real impact of that.

Thank you.

Thanks.

Our next question is from the line of Cai von Rumohr with Cowen. Please proceed with your question.

Thank you very much. So Roger, you just did these two acquisitions, maybe give us a little color in terms of how much they would add in terms of revenues, and maybe what their profitability is and kind of how they fit in?

Well, Cai, of course, we don't do that. So we really - they will both be in the Defense segment. Again, we just don't - we don't disclose revenue and EBITDA on our deals and I'll come back to the strategic nature. And you know, 1901 clearly fits with our digital transformation business, which is very significant for us, and accelerates our ability to offer services on an as a service basis, which we believe is a growing trend in the industry. Gibbs & Cox, is an exciting opportunity for us. We've learned a lot about autonomy and the Navy business and in our MUSV program, I think we had a very, very competitive bid, but we didn't win. And as good as we were about the mission equipment on the autonomy, I think there were things that we learned in naval architecture and ship design. And in the discussions with Gibbs & Cox, we're very excited about how Gibbs & Cox brings their capability around the design of the ship and the ship systems. And we bring, if you will, the mission equipment. And we're really excited about how that will fuel growth for our Maritime business going forward. And Cai, we’ll talk a lot more about Gibbs & Cox after closing. We're in that rather sensitive period between signing and closing, where we're starting to file all of our regulatory filings. And so we're going to let that get behind us. And then we'll reach out to you all and talk a little bit more about Gibbs & Cox, and its history and where we see that going.

Got it? And then maybe you could review for us the expected COVID impact, sort of what programs, you know, are the revenues not there because of COVID. You know, and what are the milestones that could kind of turn those back on?

Well, Cai, this is a gym. There are a number of programs that are impacted. But I'll just review with you some of the examples where COVID will have some impact into what we would normally see in 2021. First, with our National Science Foundation customer, the volume of people in material that have gone down to the ice [ph] and that are coming back, that will be lower, there's a significant construction project that we would have been doing now that has been deferred to a later year, when COVID will largely have abated or be gone and not considered our risk of bringing COVID down to the Antarctic [ph]. Another example is I mean, obviously, we've talked about the impact on the SD&A business where while we've had a revenue impact there, we're working to consolidate operations, get our cost synergies and get the combined business to margins that are well above where the pro forma had been on the acquisition date. The other COVID impacts, we're still recovering and getting to the - what wouldn't be higher than normal volumes in the Medical Exam business. So that business has a lot of backlog to run off and that is included in our view of 2021. And then places where we're not seeing a lingering impact, a significant lingering impact is that, you know, in our Intelligence business, the customers there are largely, you know, not a 100%, but they're getting pretty close to it. And we're pleased with where we see the volume and margin outlook in that business going. So those are a few examples.

Yeah, Cai, I would just reiterate. We think we've taken a very thoughtful view of COVID in our guidance for 2021. And we've all learned a lot about this pandemic and how it affects the economy. And we've really, I think, taken a very informed view of how it affects our business and our programs. And they're, you know, we could go through really 20 or 30 programs or disability business, and their ins and outs. There are some tailwinds because of some things that pushed from last year to this year, that we're excited about. And then clearly transportation, air travel is down and businesses associated with that will be down until the volumes come back. I mean, it's just part of the reality. That being said, border and ports, know that business seems to be going quite well. And so it is a mixed bag, and you should just take comfort is that we have gone literally program-by-program through our portfolio, and taken a thoughtful view of the COVID impact for 2021 in our guidance.

Thank you very much.

Our next question is coming from the line of Peter Arment with Baird. Please proceed with your questions.

Yes. Good morning, Roger, Jim, Peter.

Hey, good morning.

Can you maybe just highlight a little bit about just looking at the Health segment, just the margin performance there continues to be really impressive about kind of the sustainability at these levels. When you think of that business, just all the moving parts that are going on and off, also the ramping up of a new contract there? Thanks.

Sure. Yeah, you know, Peter, the first thing that I would say is that, in our view the margins there are sustainable. And while the Health business didn't have what we normally see in growth there, we continue to think of Health as being a place with above average growth potential. And that's evidenced by our ability to win the two large programs, one of which is under protest in the Health Group, it will get our growth track back to where you've seen it in the past. And then, in terms of what else we like, the margin performance historically in the Health Group has been because we're finding areas where we can apply our differentiated solution and our approach to solving customer problems with customers who are willing to pay us for the value that we bring, and again, bringing margins that are higher than the average for the overall company.

Okay, that's helpful. And just a quick follow up, just on just on re-competes. I know, this is something that you deal with on a daily and annual basis. But is there anything you would call out thinking about, you know, when you're thinking about your growth outlook for this year, heading into next…

Yeah, you know, this year coming, this ‘21 year is going to have a lot less in terms of re-competes compared to the prior - to 2020. If you think of that, we do have a large re-compete with one of our intelligence customers. We only have one that is - has a contract value of over a $1 billion. And the second largest one is an Army Corps of Engineers. It's called HR3D, that contract is a little over $0.5 billion. And then we have a number of re-competes that are kind of in the $0.5 billion range. But you know, definitely 2020 was a year of re-competes, but not so much in 2021. But with that said, we have a record pipeline. We still have a record amount of bids that are awaiting decision by our customers and we feel that 2021 is going to be yet another year of significant increase to our backlog.

Thanks very much.

Next question is from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions.

Hey, good morning.

Good morning, Gavin.

Appreciate all the color on the bridge, the year-over-year bridge for operating cash flow this year. But just wanted to ask, you know, if you have still good visibility into the - as you call them non-recurring, recurring benefits. I mean, I think at one point for 2020 you'd been thinking you could do as much as $300 million of factoring receivables. So is that still an option for this year and just curious why you didn't include any one-time items in guidance?

Yeah, let me touch on some of the strategics. And Jim can walk you through the details. First, we think we understand what the Biden administration is going to do on the payroll tax deferral. And so we put that into our guidance. There was some discussion that they may defer it, if so, that could be a positive about - you know, we have 123 in the deferral, if they decide to defer it another year, not in the $1.9 trillion, but there's a subsequent bill that's likely to come, so that could be a non-recurring item. On the asset back program, the accounts receivable, we use that when is it advantageous based upon cost of borrowing? Right, and that's really what the facility is there for, as opposed to, you know, like a revolver or commercial paper program, we're using a 364 day facility. So that goes in and out depending upon that advantageous interest rate. But you know, the overall cash story really was - we had a great fourth quarter, and we had some advance payments, we got paid, we got some non-recurrings, and we far exceeded what we thought we would achieve in fourth quarter. And as a result, some of what would have been in 2021 happened in 2020. And we tried to take you through that reversal. And then this you know, 10% to 15% growth that we expect next year, requires working capital. We’re a capital light business model, but we still have working capital. And so when we grow just the difference between liabilities and assets, requires us to fund and that comes out of cash. I don t know Jim, do you want to add more color?

Yeah. Just one thing on the - I think you use the same term, we do internally here, Gavin. And that's the recurring, non-recurrings. We can't forecast what they are, you know, there is a VirnetX issue out there, that could come as a bluebird tailwind. We just don't know when it will come. It could be a year, it could be two years. And so that's not in our forecast. The other is customer advance payments. We're two consecutive years now ending the year with previously on forecast, a big customer it advance payment balances, and we can forecast how we're working those off. But you know, that could also represent some upside to operating cash flow when we look at it this time next year.

Got it. That's helpful. And then maybe if I can just try Cai’s question on the COVID impact. Again, just I think you'd been guiding for something like a $500 million headwind in 2020, including both the direct impact to delayed starts and ramps, something on contract growth that didn't materialize. And obviously, that sets up a pretty easy comp in the back three quarters of the year. So just curious, just you know, growth guidance assumes that you recoup most of that, or if you - I know, you said you've taken a conservative approach, but just curious how much of that you assume you actually recover in 2021 versus beyond? Thanks.

Yeah, I think that our view is that and baked into our guidances, that there's probably about $150 million of that, $150 million, $160 million that is still un-recovered and really in effect, pushing more to the right. So, you know, while there might be customer requirements that push into 2021, there's still going to be more movement of more work to the right. And that's what's implicit in how we're thinking about this.

Thank you.

Sure.

Thank you. At this time, we've reached the end of our question-and-answer session. Now I'll hand the floor back to Peter Berl for closing remarks.

Great. Thank you, Rob. And thank you all for your time this morning and for your interest in Leidos. We look forward to updating you again soon. Have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.