Good day, ladies and gentlemen and welcome to the Leidos’ Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to your host Kelly Hernandez Vice President of Investor Relations. Please go ahead.

Thank you Stephanie and good morning everyone. I would like you to welcome you to our third quarter fiscal 2015 earnings conference call. Joining me today are Roger Krone, our CEO and Mark Sopp, our CFO and other members of the Leidos management team. Today, we will discuss our results for the quarter ending October 31, 2014. Roger Krone will lead off the call with comments on the market environment and our Company’s strategy. Mark will follow with the discussion of our financial performance for the third quarter and our expectations for the future. After these remarks from Roger and Mark, we’ll open the call for your questions. During the call, we’ll make forward-looking statements to assist you in understanding the Company and our expectations about 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 our SEC filings for a discussion of these risks. In addition, statements represent our views as of today, subsequent events and developments could cause our view 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. Furthermore, during this call we’ll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in the press release that we issued this morning and is also available and supplemental information on our Investors Relations website. With that, I would like to turn the call over to Roger Krone.

Thank you, Kelly and good morning everyone. First, let me start by formally introducing you to Kelly. Kelly joined us earlier this year and now leads our Investor Relations function as Vice President. Kelly has experience in a variety of roles in the investment community, including as a lead portfolio manager. I’m confident you’ll find her experience in these areas valuable and I know she is looking forward to meeting many of you in the near future. John Sweeney is leaving Leidos after serving us well through the separation and the challenging times we have had since then. We wish all the best for John and his continued success. On to the quarter. This morning, we announced our financial results for the third quarter of fiscal year 2015. Overall, I’m pleased with the progress we have made and I view this quarter as a step in the right direction for Leidos. Third quarter revenue of $1.3 billion and non-GAAP earnings per share of $0.65 reflected strong operations. Most notably during the quarter we generated solid cash flow from operations totaling $179 million. I want to thank our employees for their hard work which helped us achieve that. We saw year-over-year improvements in non-GAAP earnings per share adjusted operating margin and operating cash flow. These highlights demonstrate our commitment to improving internal operations and enhancing efficiency to maximize shareholder value even in the face of continued pressure from an unpredictable Washington. Despite the change in control of the Senate that occurred with the recent elections I don’t anticipate much of an improvement in collaboration on the hill. We expect a continuing resolution for government fiscal year 2015 with funding levels remaining near fiscal year 2014 give or take a little. We do not think there will be any big changes; however,…

Thank you, Roger and thanks to all of you for joining us on today’s call. We had a strong quarter on many fronts and I’m pleased to report increased margins, earnings, working capital efficiency and cash flow generation on a year-over-year basis. These improvements are all in the face of continue albeit moderating revenue declines driven by distressed federal government spending environment. Consolidated revenues were $1.3 billion for the third quarter, which represents a decline of 9.8% year-over-year, slightly better than our expectations and driven by better than expected performance from our Health and Engineering sector. Non-GAAP operating income margin was 7% also better than expected with $89 million of operating income in the quarter up 25% year-over-year driven by continued solid performance by our National Security sector and better than expected performance from Health and Engineering. Interest expense was $18 million below our typical run rate of $20 million a quarter driven by two items. First as Roger said, during the quarter we repurchased a $105 million of our outstanding debt at below par and second, we also entered into interest rate swap agreements for $450 million of our fixed rate debt maturing in year 2020, effectively converting a portion of our debt to variable rate debt tied to the LIBOR rate? Both of these are expected to drive reduced net interest expense as along as interest rates remain low. Our effective tax rate was below our normative rate due to favorable resolution of reserved items. Non-GAAP earnings per share from continuing operations was $0.65 per share as detailed on Slide 15 and 16 of our investor presentation available on our website. This excludes the impact of $17 million of impairment charges incurred in the Health and Engineering sector which I’ll cover in a moment. Operating cash flow $179…

[Operator Instructions] Our first question comes from Edward Caso with Wells Fargo Securities. Your line is open.

Hi, good morning. I was hoping you could talk a little bit more about what’s going on in the government sector your National Security sector as far as award decision, since you straddled the end of the government year did the award decision continue over that period and are you still seeing it continue and also maybe a little bit on pricing on recompetes and within that win rates. Thanks.

Thanks Ed and good morning. Yes although we didn’t see a big rush at the end of the fiscal year, I think we’ve seen steady progress in awards and usually we see quite a bit that stacks up kind of at the end of September, I think this year we’ve just seen them kind of rollout maybe four, six, eight weeks late, but still a fairly consistent and you’ve seen from us in the last week or two some announcements of some wins in the government sector one from NIH and one more in Lou Von Thaer’s business. And then on pricing we've all been doing this a long time, we always say when there is a downturn in the market we see pressure on pricing, but also in the upturn of the market I see pressure on pricing. There is always a value decision by our customer and we need to provide best value for those price tags we acceptable offers when we bid and I would tell you, I don’t think its any different than what we've seen in the past, but as I said in my remarks we continue to focus on affordability and making sure we provide best value to the customer.

My follow-up question is on contract duration, it seemed like for a long time with the budget uncertainty that clients had done a lot of bridges and extensions. Are you seeing them now going with longer-term contracts? Thank you.

Well, we’re still seeing some bridges and extensions as programs of records are taking time to get through the PBBs system. I think overall if you asked for a trend, we would say the contracts are probably a little shorter and therefore probably the average duration our backlog is probably tightening up a little bit from where it has been historically and I think that’s really the customers look at the budget uncertainty and when we talk to senior level customers, they don’t want to tie-up a large part of their acquisition budget over the long-term, because they don’t see top line growth and they want more budget flexibility out in the future.

Thank you.

Thank you.

Our next question comes from Cai von Rumohr with Cowen and Company. Your line is open.

Thank you very much. So a quick follow-up, you mentioned some bids that you have got after a quarter. I assume the NIH was after the reported quarter and also the NATO bid, could you indicate any others that you’ve got received since then?

I’m thinking. There are actually a list in the press release, I think of four or five that are in the press release.

Those are since the quarter or are those were in the quarter that’s was on....

NATO is since the quarter, NIH is since the quarter and I’m looking at Mark we're just scratching our heads.

That we announced, I think you covered the two big ones since the quarter on tie.

Okay and then on cash deployment your cash flow was better than expected, it looks like it’s good going forward. And yet you seem I guess John Jumper was more for a kind of buyback stock, you are not doing that kind of how should I read that, you are retiring the debt obviously to maintain the investment grade, but in terms of actually spending some of this money when might you do it, because it looks like you got a lot with more to come with portfolio shaping.

And Cai appreciate your observation, people have asked me what are some of the positive surprises that you’ve had since come into Leidos. And one of those is the strong cash flow generation that we’ve demonstrated and so it’s a nice problem to have and you know our answer is we sit down with the board every quarter and we talk about cash flow and cash deployment and based upon those discussions we make decisions, what we are going to do with our cash. As you know we still have authorization from the board to buyback stock, you can probably guess we still have room on the debt side and we will be meeting with the board this quarter to have those discussions again.

Thank you very much.

Our next question comes from Jason Kupferberg with Jefferies. Your line is open.

Hey guys just wanted to ask a question to start on a book-to-bill I mean we tend to look at it on a trailing 12-month basis just given all the seasonality and lumpiness in the metric and I think it came in on an LTM basis around 0.7 or so for this quarter, I’m sure you’d like to see it a bit closer to one and now with the new head of biz there I’m sure you will move in that direction, but how would you encourage us to think about that metric going forward. I mean is 1.0 a realistic target, let’s say over the next 12 months or so? Or you guys would obviously say there is some limitations in the end market itself.

Jason thanks. By the way it is an area that we are spending a lot of time both in Mike Pasqua’s area and Lou’s and I will tell you that Mike has hit the ground running and I think he is already making an impact. That being said we all know the time constant in this industry is months and in some acquisitions it’s year’s. That with the issues that we see on the hill it is going to take time. So 1.0 are better in the long-term is certainly what we aspire to, but to say that we are going to get there in the next quarter or the quarter after. I’d love to see it and we do have some large bids outstanding if we’re fortunate we win one of the big ones we could have a nice quarter, but the way to think about it from a run rate standpoint is we are still a quarter or two away from really being where we need to be externally focused on the customer and back winning our fair share.

Okay, understood. And just given your discussion earlier around some of the potential divestitures I certainly understand that common thing on timing, but can you give us any rough sort of aggregate size of these potential divestitures in terms of what their current annualized revenue run rate is just so we can roughly get a sense for how big of pie we are looking at here?

I think you’ll understand my answer is no I’m not going to give you a specific size or a piece of the business we are looking at. Although I’ll tell you is that we are not looking at changing the complexion of the company. Right, so we are very comfortable…

Okay.

In the markets where we currently play, we just want to make sure from a natural owners standpoint or does that fit our capital structure doest it fit our expectation on return and so I like to call portfolio tweaking. So these are smaller moves like the ones we completed in the quarter especially if the management attention is disproportionately higher than the return that we get from the business, it doesn’t make sense, I don’t want my team focus on some small businesses, because they are in more difficult markets and so we think it more of it’s a portfolio cleanup and then it is a major repositioning of Leidos.

And just last one from Mark should we expect anymore impairment charges anywhere in Q4?

Granted we’ve got our fair share of them recently. And sometimes external events like we had in the third quarter require us under the accounting rules to re-admire our outlook and sometimes that has the consequence of an impairment. So we do our annual testing in Q4, we’ve disclosed that, so that’s ahead of us. So I’ll point your attention to that, but we are just calling them as we see them each quarter and trying to focus on running the business as best we can.

Okay, thank you guys.

Thank you.

Our next question comes from Joe Nadol with JPMorgan. Your line is open.

Thanks, good morning. Roger, just wanted to come back again to the business development issue that you’ve highlighted, you seem to note that you talked about the cost cuts right after that discussion I think in your prepared remarks and that to me indicated maybe you think the cost competitive is maybe the biggest obstacle to winning, is that the way - is that what you are seeing?

Joe, clearly that’s our component and I would love to be able to tell you that we are a single product company and therefore one move would solve our book-to-bill issues. We have a portfolio of businesses and we run from very complicated, very sophisticated front-end R&D all the way to service in O&M business. By the way a cost reduction and reduction in our overhead in G&A benefits us across the board, but its more important and what we call our GST or MSG business where we’re performing service work and those contracts tend to be lowest-price technically acceptable and its much harder to differentiate yourself based upon your technical capability in those marketplaces, those tend to be more cost sensitive. So but cost reduction being more efficient reducing layers getting our processes inline benefits all of our businesses, including those in the HES sector.

Okay are there - when you look at - if you would breakdown the government segment anyway you want to do whether by capability or customer. Could you maybe given us the higher level sense of where the bookings are better and where really you have struggled a bit more?

Let’s see, we don’t guide below the government sector, but let me just pull off of my last comment and say I think people have viewed our company as a technical leader and our I think long-term competitive advantage is stronger where we have deeper technical content and by the way I think we find it less crowded there as well. As we move down into the services world we see a more crowded field and people who don’t have the R&D spend that we do. And I think if you could look at couple of layers in our organizations you would see our win rate commensurate with those comments.

Okay that’s helpful. And just a couple of little ones, may be for Mark just on numbers and updates. I don’t know if you are willing Mark you just pointed to give us a better sense of sizing the security products business where we are in terms of sales and margins roughly just after some of the items you guys have detailed here this morning. And then any update you can give on Plainfield, you still lost $6 million this quarter, how do you go about getting this off to your balance sheet?

With respect to any individual components we're trying to get away from providing a lot of that but that business is not very different in size than its recent history, it has remained our most profitable business and while we have had this disappointing news from TSA we are very optimistic in the outlook of that business and of its team, they’ve been quite agile in expanding their products sales globally despite some of the downticks from Military sales and TSA’s pause. So feel good about that still with respect to Plainfield, as we've consistently articulated we had a pretty significant down time in Q2, we took advantage of that to make some investments, we believe those helped us although we did have a mechanical failure in Q3 we've since recovered from that, we did improve performance albeit its still a loss in Q3 and we're off to a good start performance wise in Q4 and I hope to continue that trend and move towards monetizing that asset as soon as possible.

Okay. Thank you.

[Operator Instructions] Our next question comes from Bill Loomis with Stifel. Your line is open.

Hi, thank you. Roger on the awards on NSS specifically the 0.9 book-to-bill, how much of that was the awards that you’re bidding just slipped out of the quarter versus actual losses in the quarter?

Great question. Of course it’s always a mix, there are a couple of bids that if they had occurred in the quarter they obviously would have overcome the book-to-bill. Yes, I think it is a mix, part of my concern is there were bids, I thought we would be more competitive on that I thought we should win and some of those happened in the quarter, but there is always sliding to the right in the government space, I mean that’s even in good times with peer review and some of the issues that you’ve got in the Pentagon with - you’re always expect some of that to move to the right, but I’d tell you it’s a balance between the two.

And within NSS just looking at the intelligent agency business and taking Military out, what would you - what comments can you give about the business climate there in terms of what's going on, any potential reorgs impacting you within the agencies, are you seeing programs moving forward, things of that nature?

Yes, I would remark and maybe reflect that the intelligence community is probably the most consistent, most solid, because of what's going on in the world today, there is a need for the products and services and capability that those agencies provide although they are subject to the overall reduction in the budget. Frankly, the committees of Congress that affect them tend to meet in secret. It was actually great bipartisan cooperation in [indiscernible] and they actually get work done which is a terrific thing and then that rolls back to the agencies and the agencies move forward with their procurements. I’ve remarked before is that of all the customers in the DoD government space we like the intelligence community and they have a mission and an urgent need and they continue to move forward their procurements and they’ve been a very solid customer for us. I’m very pleased that we have a large part of our portfolio in that space.

And just a couple of quick ones just on Plainfield if you have no mechanical failures in fourth quarter will it be profitable? And then second on security products, Mark how much of the security products is in the guidance is that Middle East order in the guidance or no?

Yes, let me talk to Plainfield for a second and Mark can follow-up. So you are asking me to predict what’s going to happen in Plainfield over the next quarter.

No, no.

That’s okay, Bill something I’ve been here for five months and I have found I’m yet unable to do that. We certainly have a scenario where we can get Plainfield to breakeven. We have a planned outage of five or six days to do some upgrades as we get Plainfield operating at its design capacity. I think our goal will be to breakeven. Again I’m trying not to forecast Plainfield. I think that’s at the top of the range. I could see as probably maybe missing that by a few million just given whether and our history in Plainfield is we just - we don’t operate three or four months without some infant mortality issue coming up to bite us which is, why we are being relatively conservative in our discussions with the Plainfield? The good news though and by the way I know you’ve heard a lot of our development and issues relative to the Plainfield I want to highlight the team that’s been working that Jim Moos and [indiscernible] that we have demonstrated our design capability, in fact we’ve exceeded it over an extended period of time, when we have our mechanicals right the plant has been running extremely well. You saw we took an impairment against the supply contracts and that’s because we really wanted to renegotiate the quality of the C&D that we’re burning. I think we’ve gotten our way through that and as an engineer and I’ve gotten a chance to go up to the plant and spend some considerable time there. It is an amazing design effort and it’s a fairly efficient biomass power plant and we get it running on all C&D and keep its reliability where it should be relative to design. It’s a fairly profitable operation going forward. Although as I also said owning and operating a biomass fuel plant for Leidos is just not something in our long-term vision. Mark.

And Bill nothing to on my part to add to Plainfield, but on security products our guidance does accommodate a full slip to the right for that Middle East order and given where we are in the quarter I would say that’s the most likely outcome and that’s why the guidance is set at such.

Thank you.

Thank you. That concludes the Q&A session. I’ll now turn the call back over to Kelly Hernandez for closing remarks.

Thank you Stephanie and thank you everyone for joining us on our earnings call today. We’ll look forward to talking with you again next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.