Good day, ladies and gentlemen, and welcome to the Leidos Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to your host, John Sweeney, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. I'd like to welcome you to our fourth quarter and full fiscal year 2014 earnings conference call. Joining me today are John Jumper, our Chairman and CEO; and Mark Sopp, our CFO; and other members of the Leidos management team. During the call, we will make forward-looking statements to assist you in the understanding of the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to the SEC filings for a discussion of these risks. In addition, the statements represent our views as of today. Subsequent events and developments could cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I'd now like to turn the call over to John Jumper, our Chairman and CEO.

Thank you, John. As we look back at fiscal 2014 and into the future, it is clear that we continue to see pressure from our largest customers, including the Department of Defense, the federal government and, more recently, the intelligence community. The impact of sequestration and the resulting lack of clarity in committing funds to programs, delayed decisions and the high level of protest activity continue to weigh on our results. The results we are reporting today are consistent with the updated outlook that we shared with you in our December earnings call. Our outlook for fiscal year '15 envisions a continuation of these trends as budget outlays lag appropriations and uncertainty dominates significant decisions about the debt ceiling, complicated by the implementation of health care legislation. Nevertheless, we remain positive about our prospects for the future, and we have good reason to be optimistic. Our strategy is designed to drive the real value of Leidos as a company that can continue to return substantial value to our shareholders. This strategy incorporates the following factors: first, we are focused on driving organic growth; second, we are capitalizing on new markets, where we have demonstrated capacity that were previously restricted by organizational conflicts of interest; third, we are identifying businesses that are not core to our strategy and appropriately narrowing our portfolio; fourth, we continue to focus on our low capital intensity to ensure continued strong cash generation; and finally, we are on a journey of continuous improvement to streamline processes and drive efficiencies. This philosophy is the new norm at Leidos. We serve rich markets in national security, Health and Engineering. Our skills in these markets are valued by our customers and critical to all aspects of life, family, community, the nation and the world. The promise of Leidos is…

Thank you, John. I'll call your attention to the Q4 earnings presentation on our website to augment my remarks. Earlier, John focused on the segments, so I'll cover the consolidated view. As John indicated, fourth quarter results were consistent with the guidance set forth in our last earnings call in December. Consolidated revenues were $1.3 billion for the fourth quarter, which represented a decline of 18% year-over-year for the reasons John covered earlier. Our fourth quarter operating margin was 6.3%. This reflected some non-recurring items, including the last round of separation costs of $7 million. Excluding just the separation costs, the operating margin was 6.9% for Q4. Interest expense was $24 million in the quarter, higher than our norm of $20 million due to interest related to debt we assumed on Plainfield, which was retired as planned in the quarter. In addition, the $11 million of other expenses reflected the early extinguishment fees also related to retiring this debt. Diluted earnings per share from continuing operations was $0.56 for Q4. Operating cash flows were strong at about $110 million for the fourth quarter. Days sales outstanding finished at 76 days. Financing outflows were significant as expected, with $300 million used from accelerated share repurchase and $150 million used to retire the Plainfield debt. With all of that, we exited fiscal '14 with $430 million of cash on hand, with sufficient excess cash to continue the deployment strategy John mentioned earlier. On Slide 16 of our earnings presentation today, we are showing a reconciliation of our calculation of non-GAAP EPS. Non-GAAP EPS is defined as diluted earnings per share from continuing operations, excluding impairment charges, special charges related to Plainfield and costs related to the separation. We are doing this to provide more clarity and consistency in reporting our core ongoing…

Thank you, Mark. Now that the separation is behind us, we are working on getting out the Leidos name, and our branding efforts are continuing to gain momentum. We recently announced that we are the presenting sponsor of D.C. United, the most storied franchise in Major League Soccer. The Leidos logo is now prominently featured on the front of the team's jersey, displayed throughout the stadium and all of the team's marketing and media properties. The surge in the sport's popularity offered a unique opportunity for Leidos to reach a diverse and growing fan base and to build brand recognition, ultimately helping to drive our business forward. I believe that Leidos, with its team of remarkable employees, is well positioned to face the uncertainties of FY '15. We have a better understanding of where challenges are in the current government budget environment, as well as our commercial markets, and the steps we need to take to maximize the opportunities for Leidos. We are a solid cash flow generator, and we remain steadfast in our commitment to return value to shareholders. Now I'll turn it back over to John Sweeney for your questions.

Thanks, John. Now operator, we'd like to open for questions.

[Operator Instructions] Our first question comes from Cai Von Rumohr with Cowen.

So John, with the CEO search, what is your plan to stay on? What -- how long do you intend to remain as Chairman? And how, also, are you dealing with the plan to kind of find a new exec to run HECS?

Cai, excellent question. I need to make sure that you understand and everybody understands that we're -- I'm fully in charge here and we'll continue to be fully in charge. My intention is to stay in place until a successor is chosen. The board has a formal search going on that includes both internal and external candidates. And as you know, I plan to stay on as Chairman of the Board, help with the transition, and I'll stay as long as I am needed. So there is not going to be any leadership vacuum as we press on forward. We're dealing with the continuous improvement, we're dealing with the strategy and implementation, and we're making sure that the right leadership is in place and in charge.

Okay. And then maybe if you could give us some additional color on some of the moving parts at HECS, specifically the rollout of order trends in commercial health, IT, the outlook going forward for the VACIS products business, those key drivers?

Well, I think, Cai, that we're taking the steps to move forward. The leadership, first of all, in Health and Engineering remains the same. So Steve Comber is in place, in charge of the health business as the Group President, as he's always been; Jim Moos, who's the Group President of the engineering business, as he's always been. In the security products business, we're -- got a new foreign order that we have received, that we think will increase our revenues as the year goes on. The -- and the other part of the security products business, we completed a maintenance contract in Iraq that was successfully completed. And the thing that's still pending that we've talked to you about before is the TSA product orders, which are still pending. TSA has not moved on that, but as we've said before, there's about 2,000 machines out there that we know that TSA has to replace at some time, and we're well positioned to be very competitive for that. So that's, I think, a snapshot going forward.

Terrific. And just one last one. Could you give us some color on what you're seeing in terms of potential bookings and the potential pattern of bookings over the next couple of months in the NSS space?

Let me let Lou Von Thaer, who's here with us, handling that sector, President, answer that Cai.

Cai, so over the next few months, I think we have to understand these things have been very spotty. While we are seeing some increased attention from our customers and talking about restarting some of the programs that have been slowed down, we really haven't seen RFPs come out yet for those. It's going to take some time for the DoD and intel communities to gear back up to let in some of these contracts. We did have a good first month and -- of the new year, and we will continue to keep a close eye on where the backlogs and bookings build.

Our next question comes from Robert Spingarn with Crédit Suisse.

John, forgive me for asking the question in this way, but when a company changes management, often it does that before restructures and updates its strategy, and Leidos -- I guess what parent SAIC or predecessor SAIC has kind of gone it in the opposite direction. And we still see pressure from a combination of, let's call it, end-market softness, both on the NSS and on the HECS side, restructuring, maybe executions at play here as well. And this doesn't seem to have bottomed yet. And then with new leadership coming in, why wouldn't this process of, let's call it, strategic disruption continue further into the future if that new leadership wants to reevaluate things?

Well, Robert, first of all -- I think first of all, my -- it was my decision to retire and to turn the -- transition the company into new leadership that can, I think, continue to drive efficiency and performance to the next level. And I think that in the Health and Engineering sector, I think that the move we made there has actually resulted in better leadership, and we're starting to see signs of better performance there. In Stu's case, it was just a mutual decision. We've been through a heck of a lot with this separation. We've had a lot of restructuring, as you say, a lot of management attention to the restructuring. And to me, the timing seems right to make these -- get these changes behind us, get us out of the way. We've got the configuration of the company the right way and just to take advantage of this time to configure ourselves for the future. And that's what's led to these decisions.

So should I take from that that your selection of incoming -- of an incoming CEO, that that person will essentially buy into what you have here and will not be expected to make changes themselves?

Well, we are not going to preempt any decisions that a new CEO might want to make, for sure, but I will say that we are on a course with the strategy, and we have a strategy development process that is in works. It's in the -- it's being built right now and certainly, a new leadership will have a say in that. But we've also got the Board of Directors involved, and we have the rest of the management team involved in this. So you never take away the ability of whoever might be in charge to alter those things, but essentially, we have policies in place that the board has been a part of. And while there could be some change, we expect to be at least somewhat consistent in that going forward.

Okay. And then a more specific question, either for Lou or for Mark. But you did have nice margins at NSS, and I was wondering if you can talk a little bit more about the mix there and how maybe some of the fall-off in the Middle East business or something else is at work, and how we might think about the 2 large segments -- this part, I guess, is for Mark. But from a segment perspective, how should we think about your guidance for fiscal '15?

Well, Robert, I'll start with that. This is Lou. From an NSS side, we had a very strong quarter, and I think it's related to a couple of items. One is, I think, we've gotten a few of the program execution challenges that we had a couple of quarters ago behind us. The team is really starting to come together and hit on all cylinders and perform much better. We also had some onetime issues that -- some onetime write-ups that helped us in the quarter to raise the earnings a little bit higher than probably where normal points are. We had talked, back in the Investor Day, about an 8% return going forward on NSS, and I think we still see that going forward at a segment level as we look at the mix and as we look at the programs and capabilities that we have right now on the portfolio and also with the cost-cutting. We're going to continue cost-cutting through the year and expect our returns to improve slightly as we walk through the year to get to around that 8% number. The biggest challenge we have is that number would probably be higher, but we are seeing the volumes come down, as you've heard in Mark's guidance, and that's going to continue to put some pressure, but I believe we can keep up with it and be close to that 8% range.

And Rob, on the Health and Engineering side, well, that's been more volatile, as one might expect, than lose national security business in the fourth quarter. HECS did 5.4% margin. They had about 300 basis points of erosion from legal costs and Plainfield set-up costs and some low utilization in the health area. So that brings them above 8% if you adjust for those, well above 8% in the quarter. That's overall low utilization and, as John said, pretty low security product shipments in the fourth quarter as well, which we expect to see really start to build in the second half of '15. So provided we keep our utilization in check and avoid some of the non-recurring items, both legally, Plainfield setup, et cetera, well positioned for the segment for HECS to do 8% and above going forward, with the attendant risk that come with that on volume, and that's why we set the guidance, we think, at an appropriate conservative level.

And just on that $5 billion, how should that shake out the 2 segments?

It's $3.5 billion plus on the NSS side and $1.5 billion, ballpark, for HES.

So this last quarter is really a trough there in that sense, hopefully, at -- in -- at HEC in terms of the run rate?

Well, we are expecting lift from some of the design -- well, not design build, but the LSB program is the major driver for growth there. The fourth quarter is also again with holidays and so forth, a pretty low number for the labor-oriented health business, and we certainly are hoping to see some improvement there as well to get through '15.

Our next question comes from Jason Kupferberg with Jefferies.

This is Amit Singh for Jason. Just wondering if you could talk about the cash flows. I believe last quarter, you said that you expect fiscal '15 to be sort of a catch-up in payments here because of the government shutdown last year and all the delayed payments. So as we look through your guidance for the year, are you -- is that catch-up in payment happening? And then previously, you had provided the $400 million plus per year of guidance. So if you look beyond fiscal '15, is that still achievable?

Thanks, Amit. This is Mark here. Sorry for my voice. With respect to recovery of the working capital outflows from '14, our guidance for '15 -- well, first of all, let me say that we covered about $40 million of that $100 million plus from '14 in our fourth quarter. So we did a little bit better on DSOs than our guidance for '14 had anticipated. So some of that is behind us in the Treasury to be deployed. For '15, we're expecting at least a $50 million recovery of that implied in our guidance. We certainly will aim to do more and continue to strive to have our DSOs march downward, but in light of providing guidance, we make sure -- to make sure we can hit, we've applied $50 million and we'll keep going after that. With respect to the $400 million provided at the IR Day, the bottom line is the volumes we now see in the business are substantially less than what we were envisioning on that date. We point to the intelligence business. We thought we'd be more resilient in our mindset at that point, what we saw in late September, October. And as Lou said here today, there seemed just as many cuts there in intelligence as we are for overall defense. We also have to be more cautious on the overseas activities funded by OCO accounts for the reasons set forth earlier in our remarks. And so the volumes themselves comprise about a $75 million reduction in both revenues and margins from the number implied in that $400 million. So that will take some time to recover in the years ahead, but the ultimate cash flow metrics of the company in terms of capital intensity and so forth remain the same, and it's really about improving the volumes and the margins going forward.

Okay, great. And just a quick update, and I know you spoke earlier of -- about this on the call. The revenue synergies that are originally planned before the split, the $1 billion between the original SAIC and Leidos, is there any update on the time line for that? I know it started off as 3 year-ish. So where do you think and how long do you think it's going to take to realize those synergies?

So this is Lou, Amit. I'll take that one. I can't speak for the synergies on the new SAIC side, but on our side, we are starting to see some benefits from that. We're clearly bidding more work. John talked earlier of a couple of wins that we had in the last quarter that contribute to that. I'd really rather not give details because it's a little hard to predict right now, but we do have some OCI uplift in the plan for 2015. We expect that to grow through the next few years. I think, realistically, a 2-year plan to have $1 billion, this is probably too optimistic though, and we're going to see a little bit slower growth in that.

Our next question comes from Joe Nadol with JPMorgan.

It's actually Chris Sands on for Joe. I wanted to follow up on Cai's question about the components of Health and Engineering, specifically the scanners. Even with the second half pick-up, do you still think that will be a year-over-year headwind?

Could you clarify revenue question, margin question, please?

Well, the first part was revenue, and then I wanted to follow up with margin as well. Do you see contraction on the scanners year-over-year?

I'll start with that one. Maybe John will augment, but generally speaking, with the international order we have, that business is relatively flat from a revenue perspective, full year-over-year. Although as I tried to say a moment ago, the fourth quarter by itself that we're coming off of was pretty low relative to the full year run rate we expect for '15, and therefore, some marginal lift as we move forward. The overall margins of that business are very strong -- remains strong. The mix has changed a little bit. It's a little bit more product-oriented versus maintenance from the completion of the maintenance activities in the Middle East, and that has had a slight erosion of margins amidst a very favorable overall story relative to the portfolio. So the business still contributes in a very strong fashion to the margin performance of the company, and that will remain in '15.

Great. And then on commercial health, will -- what kind of margin pickup do you envision year-over-year there, if any?

From a year-over-year perspective, we are expecting margin improvement. We did incur some integration costs for maxIT and Vitalize in the predominant first half of the year, and we continue to take cost out through a variety of efforts during '14. And so assuming a stable business, hopefully a growing business, we would expect margins to improve meaningfully year-over-year as a result of the synergies of the 2 being together and the cost reductions we've made.

Let me add to that by saying that in addition to the turbulence of the separation of the company and at the same time we were doing the integration of maxIT and Vitalize, it's the same time that the market was hit with a significant down cycle. So we are through the integration anxieties of maxIT and Vitalize. We have a team in place that is, I think, very well prepared to deal with the market realities. And so this just adds to what Mark was saying about the fact that we're seeing good signs that that commercial health business is stabilizing, and we're optimistic in the overall health business about our prospects for being competitive on this new Department of Defense contract to replace their electronic health care records system, being a multibillion opportunity. We think we're very well positioned with our combination of federal and commercial health expertise there. So that just adds to Mark's remarks.

And do you have a sense of timing for when that award may come?

The -- I don't think that the award is going to be in this FY. I think we've got a -- RFIs that roll out in 3 phases, but I don't know if there's a date set for the award or not. We can get back to you on that.

[Operator Instructions] Our next question comes from Bill Loomis with Stifel.

Just going back to the commercial health care business. What gives you confidence? It sounds like that's bottoming, but, of course, obviously, you thought the same last September. What's -- in terms -- as regards to specific hospital agreements or specific awards you can to talk to about, why you feel comfortable that business is turning -- or bottoming, I should say?

Well, I think stabilizing is the right word to use. That's the way we're thinking about it. I think it's mainly because we have the right team in place. We've got a lot of new members in the -- on the commercial health side. And the way they measure progress in that business, it's a very short cycle. A lot of that business is very short cycle. So they measure opportunities and win rate. So we have increasing funnel of opportunities and an increasing win rate at the same time that's taking place right now. Again, I don't want to be overly opportunistic on this, but this is contributing to our belief that the situation is stabilizing. We've got good partnership in Canada with the win there that is really a part of a hospital system rather than a single hospital itself. And we've still got the same large bucket of individual hospitals as the customer set that we had from the beginning, and that's a fairly large number, and then these pending regulatory events that go along with Affordable Care Act that we think is going to add to our prospects as well. So it all sort of adds up and is the reason for us to be mildly optimistic at this point.

Okay. But there's still not -- it's not like you have -- like in the government business, longer-term visibility. It's taking that kind of month-by-month on that?

Yes, actually, that's correct. We're continuing with what we said that we expect to see some of these headwinds that we saw in the third and fourth quarter carry into the first part of this fiscal year and -- but performance-wise, these are good signs that I'm talking about.

Well, on the commercial energy business, what's been the new contracts out? You mentioned smart grid, but in terms of the larger dollar programs, what has been the success here since you've decided not to do fixed-price build and construct? How many cost-type wins have you had since you made that decision?

Yes, Bill, well, I think you emphasized the point that we're not using the balance sheet to finance these things anymore. That's a major point, but the major one is this contract we have with LSB that I think it's about $85 million that we've been awarded so far, with prospects of significantly more. So that's the one that -- that's the big one that we have right now. We were able to use the credentials that we've -- that we wanted to be able to use in some of the previous projects that we had to put those to work, and I think that's the kind of thing that we want more of in the future.

And just to be clear on Plainfield, can you tell us how much -- when do you -- what the sale process that is, maybe a pretty big range, what the cash proceeds could be in timing on when you sell that plant?

Let me let Mark address that.

Well, as we said all along, we want to prove successful plant operations for a sustainable period of time to put us in the position to maximize value for shareholders, and so that will be some time ahead of us. And we'll monitor that when we feel that condition has been set. With respect to the overall value, the carrying value on the books is roughly $275 million, of which the Treasury cash grant is roughly $70 million of that amount. So the net of that is, in essence, the carrying value that we have to achieve, and we're going to do everything we can with respect to the plant operations and the selling process to make sure we maximize value for shareholders at the end of the day.

Could it be a fiscal '15 event?

I would say it's possible, but I would not bank it on it at this point given the selling process could take some time and they've got Hart-Scott-Rodino involved and all of that as well, so if possible, but also do consider it could easily leak into fiscal '16.

Okay. And just one real quick one. The $243 million National Guard contract win, ID/IQ, did you include that value impact in your contract awards?

Good question, just a second. I do not think we did. Yes. I don't think we did, no.

I'm currently showing no further questions at this time. I will now turn the call back over to John Sweeney for closing remarks.

Thank you, everybody, for joining us today, and we look forward to updating you as we move through fiscal '15. Thank you, and have a good day.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone, have a wonderful day.