Greetings and welcome to the Leidos Third Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kelly P. Hernandez, Vice President of Investor Relations. Thank you, Ms. Hernandez. You may now begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our third quarter 2016 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; and Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team. Today, we will discuss our results for the quarter ending September 30, 2016. Roger Krone will lead off the call with comments on the market environment and our company strategy. Jim will follow with a discussion of our financial performance and our expectations for the future. 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, and is also available in the presentation slides. The press release and presentation, as well as the supplementary financial 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.

Thanks, Kelly, and thank you all for joining us this morning for our third quarter 2016 earnings conference call. I want to especially welcome those that stayed up to watch the end of the baseball game last night. In Cleveland, we had the final and decisive 7th game of the Baseball Championship. Congratulations to the Chicago Cubs for their late-night extra-inning win and to the Cleveland Indians for making it one of the most exciting Game 7's ever. Truly a year of the underdog. On to the call. I'm pleased with our results for the quarter. Our focus on executing the business during the acquisition process enabled us to deliver record quarterly earnings, continue organic growth, and strong cash flow. We successfully completed our acquisition of Lockheed Martin's former IS&GS business on August 16. This transformational combination has already begun to deliver on the promises that we saw. The quality of the people, commonality of values, and commitment to our customers has improved our ability to compete for prime positions on new larger programs. At the same time, both legacy Leidos and IS&GS have already begun to submit bids based on the lower cost structure enabled by the acquisition. The experience we have had as a combined entity over the two-and-a-half months since closing increases my confidence that this combination will drive increased value for our customers, our employees, and our shareholders. We enjoyed several large contract wins during the quarter, helping to drive our book-to-bill to 1.6. Most notably, we won a prime contract for $777 million single-award task order to support the Army Geospatial Center's High-Resolution, 3D Geospatial program. Leidos has a long history of directly supporting U.S. Army war fighters through vital airborne programs. Our selection on this contract solidifies our standing as a leader in airborne…

Thanks, Roger, and thanks to all of you for joining us today. As Roger indicated, the quarter results were very positive and reflected strong bookings and operating results of the combined business. Excluding the impact of the IS&GS results and our prior divestitures, the top-line grew 5.1%, while the IS&GS results contributed revenue for the seven-week period that exceeded expectations. I'll get into the segment results in just a moment. GAAP operating income of $101 million is $7 million higher than the prior-year's level, reflecting the IS&GS contribution during the period, offset by associated transaction-related charges. Non-GAAP operating income of $177 million reflects $125 million of profit from the legacy Leidos business and $52 million from the IS&GS business yielding operating margin of 10% and 8.4%, respectively. Non-GAAP results exclude the effect of transaction-related amortization and expenses and other items detailed on slide 14 of the presentation available on our website. The strong operating margin of the legacy Leidos business reflects broad-based strength in our National Security and Health and Infrastructure sectors. And, I'll provide more details on that shortly. Also during the quarter, we incurred a lower than normal tax rate driven by a few discrete items, most notably, the deductibility of the special dividend paid to our employee benefit accounts. For the quarter, our effective tax rate was 4.6%, reflecting a tax benefit of $38 million related to the portion of the special dividend paid to shares held by our employee benefit plans. Without this benefit, our tax rate would have been approximately 30% of non-GAAP pre-tax income. Slide 16 of our Investor Presentation on our website provides more detail on our GAAP and non-GAAP tax provision and tax rates. And, I'll have more on full-year tax expectations in a moment. Non-GAAP EPS for the quarter was $1.25…

Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question is from the line of Cai von Rumohr with Cowen. Please proceed with your question.

Thank you very much, and good results. So first question, so tax rate for the year, where is that expected to be now?

The full-year tax rate will be about 26% and that reflects the non-GAAP tax rate that we had of 4.6% in Q3. The fourth quarter tax rate we're expecting to return to a normalized rate of about 38%.

Got it. Okay. And could you tell us at NSS those margins look particularly good. How large were the favorable adjustments?

Well, the way I would think of this, Cai, is that these favorable adjustments were really – these were triggered on the achievement of certain contract milestones. And if we had our druthers, we certainly would have spread those. But the number is in the 20% – in the 20%s, but the thing that I would want to emphasize is that these really – these adjustments don't change our view that normalized we're expecting that part of the business to move in the direction of a normal 10% run rate margin.

Got it. Okay. And then the last one at HIS, maybe give us some color in terms of security products, how was the shipment mix in the quarter, what we look for, for the fourth quarter and same question on the commercial health, IT business?

Relative to prior quarters, the security products business was relatively light, which you normally – when you see margins like this you normally would have thought it was a big quarter for shipment. Actually the results were primarily driven by strong program performance in the Federal side of the health business. And this is outside of the DHMSM or DHA GENESIS program. So we had good contract events that led to higher award fees and a couple of good program write-ups over there.

Thank you very much.

Sure.

Our next question comes from the line of Jon Raviv with Citigroup. Please proceed with your questions.

Hey, good morning, guys.

Good morning, Jon.

Shall I take the lack of mention on 2017 guidance in the slides and release as a reiteration or any commentary on how we're tracking those numbers you provided in early August?

No, I think you ought to take it as a – essentially a reiteration of our policies that we'll give 2017 guidance at the end of the year like we always do, and so...

That's great.

Yeah. We have our Investor Day presentation that's out there and we won't touch 2017 guidance until we get to the end of the year.

Sure. And then just going into the end of the year and just going forward, how are you accounting for the uncertainty and the integration risks, when you think about your expectations going forward. For example, what's embedded in your cash flow outlook for working capital in light of the comments you made about potential innovation issues? And then secondly, how do you account for things like the Department of Energy deal going away from you or the GENESIS ramp being slightly delayed?

Okay, that was a complex question. I'll give you a sort of a top-down view and then Jim can try to provide you some details. So we build an aggregate plan, we look at risk and opportunities and we did that when we put together the presentation for Investor Day and we did that when we updated our guidance. And we build into that a reasonable view of risks and opportunities and both good things and bad things happening, and we come up with a – I think a reasonable estimate somewhere down the middle of the road. Just specifically on the DHA GENESIS program, I want to make sure that you understand what we said is that relative to revenue, we don't see the program being delayed. What we're doing is we're actually maturing some of the software, we're conducting some more tests, we're doing some cyber scans. And so the installation at the first facility will be a few months later than we had anticipated, but the level of activity is essentially the same. And the entire program if you think about deployment to all of the facilities within the Department of Defense will essentially remain on track. So we'll be a little bit later on the first couple facilities, but we expect to pick that back up as we go into the implementation phase.

Yeah. And, John, you had asked about cash flow. A couple of things worth amplifying on that. First of all, the novation process is going well. And so far, we haven't seen any material disruption in the form of higher DSO as a result of that. But it – we're still fairly early in the process and there is still a lot of more work to do as I mentioned on the call. And so to fully answer your question, we've baked in the possibility that there are a couple of speed bumps that occur as contracts, they haven't yet novated and then the customer's billing office gets a different kind of bill that has to get processed especially during that novation. So we're thinking that there might be a two-day to three-day DSO bump that is factored into how we're thinking about cash flow that we've previously guided, too, for Q4, as well as into 2017.

Sorry for the multi-part of it. Thanks a lot.

Okay. Great.

Thanks, Jon. Thanks.

Our next question is from the line of Edward Caso with Wells Fargo. Please proceed with your questions.

Hi, good morning. Congrats on a great start here. Could you talk a little bit about staffing challenges. We hear more and more about the difficulty in finding clear personnel with the new tech skills and cyber skills that are increasingly in demand.

We know, Ed, that's always a challenge, especially when we're talking about maybe the Baltimore-Columbia area, where there are a lot of contractors and a huge need for computer science skills, probably Java in particular, with what we call a lifestyle polygraph. And it's just a requirement to do certain kinds of work, and we're all competing and we're all competing for the same talent base. We're pleased with our success. Frankly, the acquisition of Lockheed's business creates a larger entity and more professional growth for employees who want to join the company, and I think we've already seen more interest in our recruiting activities than when we were standalone Leidos. One way people are dealing with that is trying to do that work away from the customer facility, and there has been some success that some of those customers, that particular customer has some other facilities around the country, where if you have an operation there, you can move some of the work away from the National Capital Region. But I think we would all admit is it's a bit of a challenge and if you've son or daughter who is thinking about a career and is going to University of Maryland, a computer science degree is probably a good decision.

Can you talk a little bit about bids outstanding? Your revenue number came in actually a little light of what we were expecting, though you raised the full-year guide for $100 million – by $100 million. So is there some good things kicking in quickly here, sort of what sort of maybe some sense of the timing and why the strength expected in Q4? Thanks.

Yeah, Ed, I'm not sure of how you got to your number because when we put our prior guide together, the number we were thinking about relative to our prior guide was a little bit lighter than where we came in at. But with that said, we have had some recent wins that we are expecting are going to put a little bit more run rate into the business, which is reflected in kind of the implicit when you do the math, where you're looking at something north of $2.5 billion of revenue for Q4, which is certainly consistent with we're a little bit better than the guidance that we previously issued at Investor Day.

Great. Thank you. Congrats.

Our next question is from the line of Robert Spingarn with Credit Suisse. Please proceed with your questions. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Hi. Good morning.

Hey, Rob. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Hey, just wanted to follow-up on Ed's question there, how do we think about the segments, as we go into the end of the year, relative to what you just said? And then more specifically on IS&GS in the quarter, it seems like the revenue was a little front-end weighted given that the deal closed right in the middle of the quarter, I think about 54% of the sales were pre-deal and 46% post-deal?

Sure, Rob. What I would say is, let me take your second half of the question first. The way we think about the weighting was that, at the end – there is two things going on. At the end of the ownership period of Lockheed, they did a lot of contract closeouts that caused an – a bit of an updraft in the revenue recognized on certain programs, those contracts were closed out and put to bed. There was both a revenue and a profit updraft. The second piece that I would tell you is that, we had an impact, it wasn't huge but it was – it had a bit of an impact on revenue and margin that is due to what we call conforming accounting adjustments. So at the closing day, we have to take all of their major programs, zero the EACs out and treat them like they are day one and begin recognizing that revenue on the accounting policies of Leidos. And so there was a bit of an impact there and the – we would estimate a drag on margin less than a 100 bps, but it is also a short-term drag that because of the way the accounting works, it tails off through the end of – if we estimate it will tail off through the end of this year and it has to do with contract contingency reserves that we are not able to carry over into our balance sheet. To answer your question about how we're thinking about segments, clearly, both NSS and AGS had really, really great quarters because of a confluence of contingency releases and contract milestones that drove a little bit above normal margins, but we're expecting them to settle back to how we previously guided. Now, one thing I would also point out is that, as Roger said, we have launched the design of our new organization and we're in the midst of implementing the organization that we previously named and that process will be fully baked in to how we're running the business through the fourth quarter. And at the beginning of 2017, we'll have a new segmentation that will effectively distribute the IS&GS business and take the legacy Leidos business and line it up along customer market basis. And we'll have more to say about that in the fourth quarter. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay.

Hey Rob, I would add, and you can dig this out of our chart, page eight in the presentation is that even the IS&GS book-to-bill for the six weeks is 1.2, and so it's really strong performance across all three of our reported sector, all significantly north of 1. So really nice performance even for that short stub period that we had post closing. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Roger, that actually dovetails right into my next question which is looking at your slide 12, second quarter IS&GS was just under $1.3 billion, that is – is that the low watermark here? You're higher than that in the third quarter. But of course you had the Lockheed closeouts. But on the other hand, you mentioned the 1.2 book-to-bill, so has the pro forma organic growth did that bottom in Q2 for IS&GS?

Well, a couple of things. First, we don't guide at the segment level. And so we're not going to give you a specific number. We did certainly in the Investor Day talk about where we thought IS&GS was trending, and I think we indicated when we thought it would turnaround and start to grow. And I think generally in the Investor Day, we looked at that more in 2017 than in 2016. And I don't think we want to be more specific than that. Other than the whole tone of I think the release and this call is, we have increased our confidence across the board, and just feel really good about the numbers that we've got out. But we're not giving any more specificity on the segments. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. I'm going to try one more then, but this is back on NSS. You had the 5% growth but you've mentioned it was international. What's going on, on the domestic side? And again your book-to-bills are strong, so when do we see growth there? Or am I asking – basically barking up the same tree, I just tried to bark up?

Well, there is a bit of barking up the same tree. But I'll let Jim, see if he can at least give you a little bit more information.

Yeah. We did indeed say that it was international. We had really strong bookings in the last quarter and year-to-date in the domestic side. So when you think about revenue across the sector including international going up and that book-to-bill is well north of 1, and in the quarter, in the 1.6-ish range. What we can tell you is that the domestic part of NSS that drives higher margins has had good growth in backlog in the last quarter, and we're thinking that, that bodes well for how the growth in the domestic side of the business will go as well. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. Just one last clarification question. On the $0.25 increase in guidance at the two ends, $0.07 is clearly the tax related gain. I just want to clarify what the rest of that is?

The rest of it is performance. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): It's all performance.

The business is performing well. Yeah. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. That's it. Thank you both.

Thanks. Thanks, Rob.

Our next question is from the line of Bill Loomis with Stifel. Please proceed with your questions. William Loomis - Stifel, Nicolaus & Co., Inc.: Hi. Thanks. Good morning and good quarter. See, just going back to the question on the margins for the segments, clearly it was a pretty material change on NSS in particular, now as you mentioned some write-ups, what was the 20%s number you gave, what were you referring to on that?

Without being specific on programs because I really can't be specific on programs Bill, these were contract milestones, these were things we were waiting to happen that enabled us to recognize revenue on some contingent events that are – they're really milestone-driven revenue recognition. And we kind of alluded to this in the second quarter when you might remember Bill, we had a little bit of a light margin quarter, and that was because the – we had some profit that was hung up and certain things happening, and those things have now happened. William Loomis - Stifel, Nicolaus & Co., Inc.: So when we were looking at the modeling, I mean you had mentioned trend towards 10% in the future, I don't – if you can clarify what timeframe you are thinking about with NSS, routinely getting 10% tight margins. But second of all, just for this year, so we should look at second quarter as being abnormally low and then you had that reversal in the third quarter, are we still generally looking at roughly a kind of a 8% trend in the group or is it going to be higher?

Yeah, I think 8% is a good way to think about it in the short run, but we've got, what we said in Investor Day, was our aspiration is to get the whole business including NSS closer to a 10% number and that we believe is achievable with the business mix we've got as well as the achievement of the cost take-outs that are on schedule for this year and beyond through to the run rate and the beginning of 2018. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. And then, can you give some comments on the UK contract, how that's performing and was that one of the contracts responsible for the uptick in margin in the quarter?

Well, that contract is not a material part of the uptick in margin, Bill. But I would say that it is – it's a complex program and as we continue to execute, I'd say that on balance we're pleased with how things are working. Roger, do you have anything else to say?

Yeah. Let's see, I don't want you to read into the word complex, that we have any concerns, actually the program is performing really, really well, and we have a great relationship with the customer and the construction of the large warehouse called the Defense Fulfillment Center is on track and be completed this year. But it – when we first introduced the program, we talked about that the margin would grow over time and we're still confident that's going to happen and that's how the program is performing. And the team in the UK are doing a fantastic job and we've actually already started to save the MOD money and we're hoping that because of our performance that program will expand even beyond our expectations. And so it's just a terrific program and we're really privileged to have that one. William Loomis - Stifel, Nicolaus & Co., Inc.: You said the Fulfillment Center completed this year, is that ahead of schedule, because I thought I heard before it was like next spring-summer?

Well, the construction will be completed this year and then – I don't want to dive off into a program review, but – so the physical fulfillment center will be complete and then we have to get those software complete and we have consolidate inventory and then we have to go through checkout and things. And so that will go on for several months significantly into next year. But if you drove by Downingtown you'd see this absolutely fantastic two new warehouse buildings at least today from the outside look almost complete, but there's still a fair amount of systems and physical build-out that has to be done between now and the end of the year. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. And then just on the margin on HIS, obviously good improvement here. You mentioned the big change from year-over-year, it doesn't sound like GENESIS had an impact, raising that margin from your description. But help me on the commercial healthcare business, did that have an impact on boosting the margin, is that improving on a revenue and profitability side on the commercial electronic healthcare record system business?

Yeah, Bill, in the commercial side, it is becoming a less material part of the business just because the rest of this sector is growing on the Federal side. But with that said, the commercial health business is performing well. We said before that the revenue is holding well, it's growing a little bit, we're experiencing good bookings there and program margins are performing well in addition to that. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. So it's not – the commercial business isn't necessarily causing the double-digit margins and GENESIS isn't either, so what is it? Is it just true-ups on some of the non-GENESIS DoD contracts? What kind of run rates should we be thinking about on margin on that business?

Well, I don't think that it changes the long-term view that we've expressed which is in the 8%-ish. We've said before that the DHA business is accretive to our overall health margins, okay? And that as I said before, the margin on that program hasn't changed and it wasn't responsible for the drive up to 12.8%. What is, is other programs that are in the Federal Health business. So we have a number of other programs that serve the VA and then they also serve the defense health business and we've achieved some contract milestones that have brought the margin up for Q3 as well. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay, great. Thank you.

Okay.

Our next question is from the line of Tobey Sommer with SunTrust Robinson. Please proceed with your question.

Thank you. I was wondering if you could speak to the prospects for new projects in the healthcare record space in the – in your public healthcare business, particularly as you may be positioned relative to the VA if they eventually move forward and decided try to modernize their systems?

Well, we'll talk a little bit Tobey about sort of what's going on in the VA, but I will tell you my ability to predict the future will be a lot better a week from now maybe. See there is – I think, let's start with the basics. I don't think anyone would disagree that in the near-term, the VA will go through some modernization. And I think the VA is in the middle of a study trying to ascertain whether they continue with their essentially in-house legacy system, which is a [MinX] database where they go with a more of a commercial off-the-shelf system and the VA hasn't made that decision yet. And I think it would be actually a considerable amount of time, maybe into the next administration before they make a decision. With the acquisition of IS&GS, they had won a kind of a precursor to a new EHR/EMR program, which is a scheduling program and that has some potential I think to get funded and to kickoff and to be more significant part of our VA portfolio in the future, but we'll just see how that particular program fits into the overall strategy, and that isn't an electronic healthcare records so much per se, but it is scheduling, which is one of the challenges that VA has, which is getting vets in and out of care facilities.

Thank you. And sticking with this theme relative to the GENESIS contract is, should we be thinking about for modeling purposes a little bit of a slowdown in growth when that enters the testing phase or is that not a big concern given the size of the segment overall?

Okay. So we've talked to the DHA GENESIS program in the past, and we have said that, we have to configure the software, we go through test, we could go through some initial installations and the customer uses the software for the greater portion of a year, and then when they are to the point they are comfortable, and they like the way the workflows operate, and user interface, then we move into a more aggressive deployment process. And we still view the program that way, we don't see really any change to the way it's configured. So given what we have said in the past, this is – there is not a slow down, there is not a delay, but we did describe that there would be a probably a lower revenue in the next year, and then it picks up and – but that configuration is very consistent with the guidance we've given you in the past.

Okay. Thank you very much for your help.

Yes. You're welcome.

Thank you. Our next question is from the line of Amit Singh with Jefferies. Please proceed with your questions.

Hi, guys. Thank you for taking my question. Earlier, you had put out a cost saving target, I think on the gross level of around $25 million in fiscal 2016, I think reaching $175 million in 2017, and then going from there reaching $350 million in fiscal 2019. You earlier mentioned that you've already achieved your fiscal 2016 target. And there's still time to go in the year. So is there an update there for – especially for fiscal 2016 and fiscal 2017?

Yeah. We're not ready to say exactly what the number is going to be, but it's going to be well north of the $25 million that we had indicated before. And the integration process in many ways got kicked off before we closed Amit, which is how we were able to overachieve on that. So what does that mean for our confidence in next year's target? Obviously, if you've got a good head start, you're feeling a lot better about our ability to achieve that, and to hit the numbers. The big things that we have to do relative to achieving those targets in the coming year is system related. There are a lot of system enablers that will enable us to reduce IT costs and consolidate operations. And those are proceeding well, very well for us and certainly are on schedule, where normally you think of those as having schedule risks. So we've done our upgrade that gets us ready to begin the process of porting over the lion's share of the back-office systems from IS&GS over to what we have. The one other thing that I would comment on where we're expecting to have a significant amount of cost savings is in real estate consolidation and those plans are also proceeding apace.

And let me just add to the color there. First of all, we're really pleased. We had established what we call an integration management office and it was jointly populated by Leidos people and folks from IS&GS, but of course no actual integration or any actual activity happened prior to closing, but we were able to put some fairly detailed plans in place so that the day after closing, we were able to hit the ground running and that's really given us a fast start starting on the August 17 to achieve our integration objectives.

Great. And then as you look at your integration plan, which involves the systems, people, facilities, if you could put a percent of what percent of this overall integration is complete right now and any sort of timeline on when do you expect to say that okay most of the integration has done here?

Well, what a very complex question? Yeah. What you may be interested, we have a number that we put out at about $350 million in value capture and we've given you some numbers year-to-date. You could use that as a percentage. Really it's people organization, it's systems, it's real estate, it's just really, really complex. There will be integration activities that occur well into a calendar year 2018 and just getting some of the general ledgers brought together and some of the back-office systems. We expect to do, probably the HR system in 2017 and we'll probably merge into a smaller number of general ledgers, perhaps probably on the annual close at the end of 2017 and beginning of 2018. But we could see a continued activity well into 2018, but on a percentage basis, I don't – we don't really track it in that way and so I don't have a number for you.

All right. Thank you very much.

Yeah.

Thank you. At this time, I will turn the floor back to Kelly Hernandez for closing remarks.

Thank you all for joining us on our earnings call today. We look forward to sharing more updates with you next quarter. Thank you.