The operator welcomes participants to Leidos' Second Quarter 2024 Earnings Conference Call and introduces the CEO and CFO. The call will include forward-looking statements and discussions of GAAP and non-GAAP financial measures. The CEO reports a record quarter for Leidos with strong organic growth and increased profitability. The company is also successfully converting earnings into cash and deploying capital to grow shareholder value.

The company is halfway through their commitment to repurchase $500 million worth of shares and has raised their guidance for the full year. The CEO updates on the progress made in their four focus areas: instilling a "Promises Made, Promises Kept" culture, sharpening their strategy, improving performance of previous acquisitions, and enhancing their ability to win new business. The company's strong balance sheet allows for potential share repurchases, but they are also considering investing in exciting growth opportunities through their new North Star strategy. The company is currently focused on both program execution and strategic planning.

Leidos has completed work on their proprietary hypothesis of the future and is now halfway through crafting a new business strategy based on it. This strategy will focus on leveraging and enhancing their current core businesses and utilizing technological innovation, such as Trusted Mission AI and cybersecurity, as key differentiators. Leidos has also been investing in Zero Trust and is currently pioneering the use of quantum technologies for secure networks.

Leidos is actively involved in contract R&D for DARPA and investing in post-quantum encryption technologies to stay ahead of developments in quantum computing. They are also focused on unlocking the strategic value from their recent acquisitions, particularly in the areas of security, detection, and automation. In satellite payloads, they have successfully delivered all payloads for Tranche 0 and are on track to deliver Tranche 1 in 2025. They are also partnered with Sierra Space for Tranche 2 and are well-positioned for Tranche 3. In force protection, they have delivered prototypes for IFPC Enduring Shield and expect to begin low-rate production in 2025. In hypersonics, Leidos is supporting the US in developing and fielding hypersonic weapons through their Common-Hypersonic Glide Body and MACH-TB programs.

The author discusses the critical role of hypersonic programs in advancing the nation's capabilities and the positive financial performance of the Defense Systems sector. They also mention the successful integration of the SD&A acquisition into the SES business area and the improved performance of SES due to focused efforts and investments. The new organizational structure and emphasis on execution and promises made are credited for the improved acquisition performance. Additionally, the author notes significant progress in enhancing business capture and backlog quality.

Leidos has achieved net bookings of $4 billion this quarter and has nearly $3 billion of awards currently under protest. They have a total backlog of $36.5 billion, including $8 billion of funded backlog. The company is not satisfied with their performance and is working on improving their customer-centric framework of account management. They have hired dozens of key account managers and frontline growth leaders with deep mission and customer expertise to support their growth commitments. Leidos has dedicated 100 of their top engineers and solution architects to their frontline growth efforts and is focused on improving their business capture performance in the future.

In the second quarter, Leidos had $26 billion worth of bids awaiting adjudication, and the quality of their work is improving. They are making progress on their focus areas and are well-positioned to execute their North Star strategy. The company's revenue grew by 7.7% and their adjusted EBITDA increased by 33%, resulting in a record margin of 13.5%. This was achieved through a strong demand environment and effective cost management.

The company's program-level execution was strong, but there were some adjustments that resulted in a $12 million loss. Non-GAAP net income and EPS increased significantly. The National Security and Digital segment saw a 1% increase in revenue, while the Health & Civil segment saw a 22% increase. The Commercial & International segment also saw a 3% increase in revenue, but there were some write-downs in the UK business due to changing requirements and schedule delays. Overall, the company's profitability has been ahead of plan for the first half of the year.

The UK write-down had a significant impact on the non-GAAP operating income margin in the quarter, but without it, the Commercial & International segment would have seen strong revenue growth and operating income margins. The new organizational structure is expected to improve programmatic execution and bring the UK operations back on track. The Defense Systems segment saw a 6% increase in revenue and a 170 basis point increase in non-GAAP operating income margins. The company generated $374 million in cash flows from operating activities and had its highest collection week ever. DSOs improved by one day from a year ago.

In Q2, the company repurchased $114 million in shares and paid $51 million in dividends. They ended the quarter with $823 million in cash and $4.7 billion in debt, with a gross leverage ratio of 2.4 times. The company has raised their revenue guidance for 2024 by $100 million and increased their adjusted EBITDA and non-GAAP diluted EPS. They expect strong momentum in their managed health services business, but there may be some headwinds in their VBA disability exam business due to an upcoming recompete and budget challenges at the VA. The company is already seeing a reduction in their case backlog due to measures taken by the VBA to manage their budget.

The company expects a rebound in caseload for veterans benefits in the fourth quarter, despite temporary funding issues. They are confident in their ability to provide exceptional service to veterans and anticipate a rebound in margins for Commercial & International. They also plan to invest in growth through an innovation fund. The first question in the Q&A session is about the strong margins in managed healthcare and the company's competitive advantage in this market. The company attributes their success to their installed base and other technical advantages.

The company's success in serving veterans is attributed to their passion and investment in technology. They are confident in their future growth and are focused on maintaining a strong partnership with the VA. The company is also planning to continue investing in technology to improve their services. The team is determined to not only maintain their current business, but also increase it in the future. They have a strong track record of winning recompetes and are confident in their ability to continue serving veterans.

Leidos has made investments in physical locations, mobile locations, provider networks, and critical staff for their customers. They have a track record of strong performance and are sharpening their pencils to defend their position. Leidos is focused on hiring and training top talent for their account managers and solution architects, and they are determined to be the employer of choice in the industry. They believe that the more they win, the more people will want to join their team. They understand the importance of fully supporting their employees in order to serve their customers effectively.

Leidos is investing in their people, processes, and tools to bring solutions to their customers and attract great talent. They are also focusing on helping new employees understand the breadth of their offerings and utilizing technology to support their growth. The company is also looking into portfolio pruning initiatives and is currently in the process of evaluating their future plans.

Leidos has a unique and forward-thinking view of the world in 2033, which is shaping their business strategy for the next five years. They have already identified potential winners and are investing in them. The company's focus is on doubling down on their core strengths, developing repeatable business models, and prioritizing speed and scale to solve complex problems for their customers. They also see Trusted Mission AI as a key technology for the future and will continue to invest in adjacent white spaces.

The speaker addresses a question about portfolio investment and explains that they believe in differential investment for differentiated results. They also mention upcoming recompetes, including a potential opportunity in the hypersonics arena and the DHMSM contract. They invite the listener to attend their March Investors Day for more information.

The Leidos team is focused on putting their best foot forward in proposal bids for the middle of 2025. They have a strong pipeline and are excited about growth opportunities. In the National Security and Digital segment, there was slow growth in the first half but an expected acceleration in the second half. However, margins may be lower in the second half. The company is confident in their ability to win future contracts in this area.

The speaker believes that the company's revenue growth is a positive sign and they are focused on helping customers with their problems. They also mention potential margin upside and recent wins, including a key contract for the Defense Enclave Services program. They are optimistic about the future and do not anticipate any major issues.

The speaker discusses the company's strong performance in working capital in the first half of the year and their focus on managing cash. They mention progress in managing payable and DSO and state that there are no major uses of working capital expected in the near future. The speaker also mentions that they are focused on the strong performance in the third and fourth quarters. A question is asked about the potential impact of a new contract on profits in the Health sector, but the speaker states that they do not know yet as they are awaiting the RFP from the customer.

The VBA's contract with the company may be extended or renewed for a different period of time, but the details are unknown. The VBA has asked for more funding, indicating a demand for care for veterans. The company is focused on growing earnings and has a goal to maintain a book-to-bill ratio slightly better than 1 for 2024, with potential for exceeding that if certain opportunities are successful.

Tom Bell discusses the company's focus on building a quality backlog of profitable business instead of chasing quarterly book-to-bills. He mentions that the team is very focused on this, and they are doing a better job of bidding for projects that will reward the company adequately. He also mentions that the company had a write-down in their Commercial & International division due to changing requirements and schedule slippage on two fixed price contracts in the UK. This was the result of new eyes and a new organizational structure looking at the business with fresh perspectives.

The CEO of Leidos is confident in the progress made by Vicki and her team in scrubbing their portfolio and reducing the number of watch programs. They are focused on making Leidos synonymous with AUKUS Pillar 2 and have hired new talent to support this goal. The SES team has also performed well, with the commercial energy business expected to have a strong second half. Overall, the CEO is optimistic about the prospects for Commercial & International and the entire portfolio.

Tom Bell, speaking on behalf of Leidos, discussed their strategies for Counter-UAS and their portfolio in this area. They have a classified briefing coming up to assess their capabilities and see if there are any new investments they should make. They are optimistic about their opportunities to serve in this area, but the question remains if they have something compelling for the customer. A question was then asked about the pipeline and production capacity for each segment in 2025 and 2026, to which Tom and Chris gave some high-level metrics.

The company has a robust pipeline with opportunities worth over $1 billion in various segments. They are confident in their positioning and have a large number of pending awards, including some big home runs. The production capacity is well-equipped and there are no major investments needed, but they are open to expanding if necessary. The company has a positive outlook for their future projects.

The company's executives discuss their recent business capture problem and how they plan to break inertia by implementing new talent, processes, and tools. They are confident that this will lead to momentum and actual wins in the next 12-15 months, though decisions in their customers' environment take time and are often protested. They have raised guidance for the quarter, except for cash flow, which they are managing conservatively due to the possibility of some earnings coming in January instead of December.

Tom Bell and Ken Herbert discuss the uncertainty in the market due to the election year and budget challenges for customers. While they are pleased with the first half of the year, they are cautious about overpromising and will keep their powder dry. They also mention the potential for upside in their expected buyback and will reassess based on cash flow in the third quarter.

In the paragraph, the speaker, Tom Bell, reassures an analyst, Ken Herbert, that the company will continue to be careful with their cash and prioritize shareholder interests. The next question comes from Noah Poponak from Goldman Sachs, who asks about the company's EBITDA margin and EPS for the second half of the year. Chris Cage responds by explaining that the guidance for the year implies a margin of around 11% in the second half, which is an improvement from their initial expectations. This is due to the company's strong performance in the first half of the year, even though there may be a decrease in disability examination work levels.

The VA's throughput is expected to be lower in the next few months, but there is potential for it to do better. The National Security and Digital sectors have had a strong first half, but the company has pulled back on second half guidance. The company is making investments to ensure success in 2025 and is well positioned for the future. The second quarter profitability was aided by incentives, but the underlying business remains solid. The VA recompetes are imminent, but the timeline is fluid and an extension may be more likely.

The speaker states that they have been preparing for different scenarios, but it seems likely that there will be an extension rather than a recompete. They are ready for whatever the VA decides, but cannot commit to anything. They expect a slowdown in activity until the new government fiscal year, but Congress could potentially help in the short term. The Q&A session ends after an hour and the speaker thanks everyone for their interest in Leidos.

This summary was generated with AI and may contain some inaccuracies.