Greetings and welcome to the Leidos first quarter 2017 earnings results. 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 Hernandez, Senior Vice President of Investor Relations. Please go ahead, Ms. Hernandez.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our first quarter 2017 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 March 31, 2017. 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 information file are provided on the Investor Relations section of our website at ir.leidos.com. With that, I'll turn the call over to Roger Krone.

Thank you, Kelly, and thank you all for joining us this morning for our first quarter 2017 earnings conference call. As the first full year of operations of the new Leidos post acquisition of IS&GS, this is a critical year in the company's journey to deliver competitively priced innovative solutions to a broader set of customers and to deliver value to our shareholders. That being said, I'm really pleased with how the year has started off. Our first quarter performance exceeded our expectations on revenue, margins, and earnings per share. During the quarter, we achieved the highest level of adjusted EBITDA margins for the company since our 2013 split and successfully turned IS&GS to growth. The diverse mix of our business, the focus on execution of both customer programs and the cost reduction initiatives enabled us to start the year with strong financial results and remain very confident in our full year guidance. As Jim will detail for you later, during the quarter we also restructured our business segments along our end markets. And our new reportable segments are as follows. The first is Defense Solutions, which represents about half of our business. This includes our Defense & Intelligence Group led by Tim Reardon and our Advanced Solutions Group led by Mike Chagnon. Next is Civil led by Angie Heise which represents about a third of our business. Third, our Health segment, continue to be led by John Scholl, represents the remainder of our business. And finally, we continue to report corporate expenses under the Corporate segment. The design of this segment structure is a reflection of our corporate culture focused always on our customers. Throughout the acquisition and integration process, we've been very careful to avoid disrupting any of the strong working relationships that our employees have fostered with…

Thank you, Roger, and thanks, everyone, for joining us on the call today. We're off to a good start for the year, and as Roger previewed, we believe that we're on track to deliver to the guidance we provided in our last call. Consolidated revenues for the first quarter were $2.6 billion, nearly double the prior year's level, reflecting the acquisition of IS&GS. On a constant currency basis, revenues were roughly flat organically when adjusting for the acquisition of IS&GS and the divestiture of our heavy construction business. Also notable in the business is that after a long period of revenue declines within IS&GS, we were able to inflect to growth in the quarter, with revenues from legacy IS&GS up 1% on a year-over-year basis. We are pleased with this turnaround, and we believe that this reaffirms our thesis that with the acquisition, a lower cost structure, and more services aligned corporate structure would have positive impacts in the business. The strength in all of our businesses this quarter helped us achieve our highest level of adjusted EBITDA margin since our split in 2013 at 10%, up 210 basis points from the prior year's level. Achieving our full year target early in the year is a great accomplishment, and reflects successful cost reduction actions, as well as strong program performance across all of our businesses, Civil, Health and Defense Solutions. I'll discuss these more in a moment. Non-GAAP diluted EPS from continuing operations was $0.88 per share on a basis of 153 million shares outstanding in the first quarter. Our non-GAAP diluted earnings per share primarily excludes the impact of $69 million of acquired intangibles amortization and $32 million of restructuring expenses and acquisition and integration costs. Operating cash flow during the quarter was lower than normal at a use…

Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Jon Raviv with Citigroup. Please proceed with your questions.

Hey, good morning. Roger, I understand that in the slow award environment you can't really control. But more on the unexpected losses, can you characterize what end markets those were, what's the postmortem, what are you doing to address and where and when you expect those losses to manifest, for instance, should we think about that driving us to the lower half of the sales guide for instance?

Yeah, okay, Jon. Thanks for the question. At the time we closed the deal, there were about 150 bids outstanding between the two heritage companies. And they were bidding the heritage company's cost structure and with separate technical solution. So, as we have moved into this new year, those awards are finally working their way through the acquisition process. And although we are actually quite pleased with how most of the proposals have done, there is a small number, count them on less – on one hand, that we were enthusiastic about winning and we didn't. And I would say they were broken into half of those were the nature of our technical offering and half of those were where we were from a cost stand point. And realize this was a technical offering put together by the separate companies, so we didn't have the advantage of pulling our technical resources, and they were bid in the heritage cost structure. And we've actually updated our rates twice since we put these proposals in, once on day one, and now we just updated our rates again here in 2017. That being said, no one ever likes to lose, and so we do as we always do, we call it (24:55) and we do an after-action review. We go back and look at our competitive posturing, where we were in the pricing range versus where the awardee was, we take that, we go back, look at our cost structure to make sure that we are doing all the right things to continue to be competitive in the marketplace. In total, none of these were I would say material or significant, they are in – one is in the double digit millions, one – couple are in the three digit millions. But in the scheme of our business development pipeline, like I said, at any given time we have 150 bids to 200 bids outstanding. We don't see it as material. And again, we've reaffirmed our revenue guidance for the year and we think we're going to be just fine.

And just to clarify the double-digit and triple digit millions, that's not an annual run rate, that's over time?

That would be a face contract value.

Yeah, indeed. All right. Thanks for thoroughness. I'll get back in the queue.

All right.

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

Hi. Good morning. Could you – you mentioned a few times about pulling forward some performance. Could you sort of frame that for us, sort of how much was brought forward out of future quarters, and how much was just upside?

Yeah. Ed, we're – I wouldn't characterize that as a number of contracts, particularly as we saw rack up in the health business. And when you think of these kind of pull forwards, typically there are EAC adjustments, and these are the kinds of things that are – I would call them ordinary course of business, they just were more phasing – time phasing items rather than things that we would say give us a reason to think that the margin that we have in – I am thinking of this, the health business is sustainable, so at the 14.9% rate. So we're pleased that those what we call pull forward items are there and again, they're more reflective of now that we're at a lower cost structure, we can update the longer term profit picture for a number of contracts and these were kind of updates to those EACs. So think of them as write-offs.

Great. Other quick question, tax rate a little a little lower than we thought, is this the new accounting standard kicking in?

About half of it is the new accounting standard, Ed, and then the other half of it are permanent differences that we were able to pull in. There was a little bit of R&D tax credit there, but generally it's about – half of it is new accounting standard and half of it is real cash differences.

Thank you.

Thank you.

Our next question is from the line of Cai von Rumohr with Cowen & Company. Please proceed with your questions. Cai von Rumohr - Cowen & Co. LLC: Yes. Thank you very much. To maybe follow up on Jon's question. Roger, what was the annual run rate of the disappointing losses and what was the annual run rate, your expected annual run rate approximately of the 38 new IDIQ wins and did you have any bids that you won, but were protested and hence didn't make it into backlog?

Great question, Cai. Of course you know we don't do that. So, relative to the run rate, I will tell you that two of the four bids were takeaways from other contractors where business was re-competed and we felt we were competitive enough – we're competitive enough to take the business away. I will tell you on the protest, sort of the business as usual today is there are always protests and there were some awards in the period that were protested. Frankly there were some that we protested and there were some where the protest expired and we were eventually awarded the contract. And I think with all defense contractors and government contractors, we just see that as a fact of life today. Cai von Rumohr - Cowen & Co. LLC: And then to the question on the 38 IDIQs, what's your expected run rate?

I'm not sure we have actually put it in that frame. We talked about $1 billion, plus a $1 billion task order generated from those, I mean that is typically is a couple of years – couple of hundred million dollars per year, maybe little bit higher than that. Cai von Rumohr - Cowen & Co. LLC: Thank you. And then, Jim, you had a low tax rate in the quarter, did you adjust your tax rate for the year and if so, how come the earnings numbers didn't go up?

We haven't yet adjusted our expected tax rate for the year. We're – if we're going to make an update to the guidance, say, in the second quarter or third quarter, we'd probably take a second look at how we treat that in our guidance picture. When we see the tax rate coming down a couple of points, it gave us about a $0.015 of tailwind on the EPS number which in the context of $0.88 non-GAAP, we didn't think it was that huge at this point. Cai von Rumohr - Cowen & Co. LLC: Okay. And then last one. In the Defense Solutions, you mentioned the charge on the fixed-price contract. Just for context, roughly how large was that charge? And is that totally behind us?

Right now we think that the charge was certainly an adequate charge to take account for some increased costs that we had to make sure that we execute right for the customer involved. And so we're confident that it was more than adequate. I would characterize it as a charge that's in the mid-teens in terms of millions of dollars. Cai von Rumohr - Cowen & Co. LLC: Thank you.

Sure.

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

Thanks. Given generally better margin performance since the IS&GS acquisition and the expected, I guess, DSO relief in the back half of this year, do you look at the back half of this year as having increased financial flexibility with your debt level to start looking at repurchase and acquisitions a little bit more seriously? Thank you.

Tobey, I think we've actually confirmed that view from the very beginning. And the performance that we have to date I think is going to allow us to do that. And so of course there's always uncertainty, we're trying to figure out what's going in the government and it's early for us, but we always talked about looking at the back half and the cash generation and our capital allocation, capital deployment philosophy in finding the most efficient way to get that money back to our shareholders.

And the last follow-up from me is, how understaffed are the – your agency customers at this point, at the undersecretary kind of (33:06)?

I won't go agency by agency, but let's take the Department of Defense. So the Department of Defense has one confirmed person, and that would be the Secretary of Defense. There are now identified candidates for some of the service secretaries and the Deputy Secretary of Defense, but now with healthcare sort of being the topic of the day, it's not clear when those will even get before the Senate. And we find other agencies in a similar position. I'm not sure this is a precise number, but it's a number – over 500 confirmable administration appointments that have not been confirmed yet. So it's significant. I was with another customer – I was with the NASA customer and of course they don't even have yet an identified NASA administrator. And so the civil servants, these are really great individuals, are doing the best they can to operate the government with the authorities that they have.

Okay. Thank you for the help.

Yeah.

Thank you. Our next question is from the line of Noah Poponak with Goldman Sachs. Please proceed with your question. Noah Poponak - Goldman Sachs & Co.: Hey, good morning, everyone.

Hey, good morning.

Good morning, Noah. Noah Poponak - Goldman Sachs & Co.: Can you remind us what percentage of revenue comes from OCO, roughly?

Yeah, I think in the past, I mean a couple years ago, it was in the $200 million range. Now it's coming off that a little bit. The thing that's always kind of the wildcard in that number, Noah, is that in the past two years the DoD has exercised perhaps more discretion on what comes out of the OCO budget than they have when that budgetary mechanism was first established. So I think that we're going to see that change again in the coming year, now that there's kind of a new budgetary regime in place that has a different way of working around the sequester limits, so. Noah Poponak - Goldman Sachs & Co.: Okay. When you were discussing Civil vis-à-vis the 2018 request that had DoD up a decent amount, but Civil sort of funding it. I couldn't tell if you were saying that you were not as concerned as you hear investors are because the recent versions of bills we're seeing don't actually have those cuts going forward, or if you were saying that even if those cuts actually did occur, you just feel like you can navigate them with your positioning?

Well, let me start out with an incident – Jim can add to it – is if we look at whether it be the 2017 appropriations bill or the 2018 skinny budget against the civil agencies where we have a significant proportion of our revenue and then the departments of those agencies like Department of Transportation, where we have a lot of FAA work, we don't see even in the skinny budget significant cuts to the agencies that are our primary customers or the departments in those agencies that are our primary customers. And in fact, in some of our business like DHS, we see administration emphasis and priority, and increased spending. And so that give us reasonable confidence – again, we don't have a 2018 budget – that we can maintain our top line in that sector. Jim, any – ? Noah Poponak - Goldman Sachs & Co.: Okay.

Yeah. Just in the world where there were going to be big cuts to certain agencies under the original, what they call the skinny budget, even then we didn't see material exposure. Now that the skinny budget isn't skinny, we see even a more, I'd call more immaterial. As Roger indicated, the places where we're strong in Civil are places that are aligned to the administration's priorities, be it infrastructure work, working with the FAA, Centers for Medicare and Medicaid Services, Social Security Administration, et cetera. Noah Poponak - Goldman Sachs & Co.: That's interesting. And then just one more, just IS&GS being up 1% organically in the quarter. It sounds like that was earlier than what you were thinking, even just last earnings call. Was there something pulled forward, or do you think that's actually sustainably in the black through the rest of the year?

There was some element of pull forward, but I think that what we were really thinking was that we weren't going to see a return to year-over-year growth until the middle of this year. So, it was a couple quarters earlier and that's encouraging. I think the other thing that we like seeing, not just in the IS&GS part of the business but in the legacy Leidos part of the business, is stronger margins. And clearly, the thing that we're seeing now is stronger margins, strong program performance, because of the cost reduction actions that we've taken which you're going to see that more immediately in margins and fairly soon. We expect to see it in win rates and more backlog building, because we're certainly able to bid on more competitive footing. Noah Poponak - Goldman Sachs & Co.: Terrific. Thank you.

Thank you, Noah.

Our next question is from the line of Krishna Sinha with Vertical Research. Please proceed with your questions.

Hi. Thanks for taking my call. Just honing in on the Defense segment. Obviously you had a program specific or some program specific problems there. Can you just describe to us whether the bid environment has changed in Defense where maybe there is you're seeing margin compression across the board, because you're not the only one that have talked about defense margins being down. And it seems like everybody has got company specific reason. But I'm wondering if there is a broader trend here where you're seeing increased competition in that space. So can you just talk about that?

Yeah, what I would say, Krishna, is there is absolutely, I mean everyone in our business has to think of the environment remaining very cost conscious and cost competitive. With that said, we're pleased that aside from the one program where we did have to take a charge in the quarter, the business is running really well with strong margins and strong performance in the business. So, I think that – if you rewind a few years, when there was a wave of really competitive pricing pressure that started or intensified, I would say, our industry I think responded across the board with being very, very cost conscious and cost aggressive. And I think that – the scale of our business now that we've – we're incorporating and integrating the IS&GS business, it affords us the ability to be as competitive as anybody from a cost standpoint, and at the same time, remain anchored around our target margin percentages.

Okay. And then on – IS&GS was up 1% organically, but it looks like Defense was down organically, Civil was down organically. I understand part of that was from currency and some other things. But you said commercial energy services was down. Can you just give us the moving parts on what drove that IS&GS coming up and what does that imply about the core Leidos business, so the pre-IS&GS business? Can you just talk about what you're seeing on that side of the business as opposed to IS&GS, which is up?

Yeah. There were a lot of embedded questions. I'm going try to zero in on what I think you are focusing on and that is the – if IS&GS is up a point, what's going on in the legacy Leidos business. And what I would tell you, it's kind of a tough compare in Q1 because a year ago we had strong growth in the Leidos business, primarily on the backs of the U.K. program which was ramping up substantially, as well as the DHMSM, the defense health agency program that was ramping up then. Part of that ramp-up a year ago was in a construction portion of the U.K. program that is now completed. And so there is a dampening effect on the legacy Leidos growth from that, and then there is also where we have a big development push that we were under a year ago in DHMSM that we're not undergoing right now. And right now we are in the testing phase on DHMSM and next year we'll see another big ramp up on that program as we begin the broad rollout across the Defense Health facilities.

Okay. And then, just one quick one on cash. You talked about elevated DSOs in the first half. But how are you guys trending on your cash restructuring expenses year-to-date and do you see anything unexpected that's coming up here or nothing, something that might not be in the plan that you took charges on or is everything trending kind of exactly how you thought it was going to?

Right now, everything is trending exactly where we were expecting and the – as I think we alluded in the call, we're actually ahead of our expected realization of cost reductions. We're pleased with how that's going. And normally, when I see better cost takeout than we had planned, I would've expected more restructuring and severance type expenses, which we haven't been seeing. So, so far the return on the restructuring expenses, I'm feeling, is a little higher than we expected.

That's great. Thank you.

Okay.

Our next question is from the line of Brian Ruttenbur with Drexel Hamilton. Please proceed with your question.

Yes. A couple of quick housekeeping. First of all on your guidance in 2017, I didn't catch it. Did you anticipate then a government fiscal 2018 budget to be passed on time, or are you assuming a CR? What is in that guidance?

Yeah, we assume a CR probably at least for calendar year 2017. So as you know there's a quarter mismatch between the government fiscal year and our year. But despite the President's comments, and we're hopeful that he's right, but history has taught us to expect a CR.

Okay. And then just two other little follow-ups. Integration, are you 50% integrated in your opinion on IS&GS, and that integration will be complete by the end of calendar 2017? Or when do you consider it done and put a tombstone in it?

Yeah, it's a great comment. We're engineers and program managers; we actually have a metric. And we actually hit a 50% internal metric on 1 July, just so you know. But we really accelerate the back end of integration, and we expect to be in the 90% done by the end of first quarter of 2018. So – and that program has really gone well. And now Sharon Watts, our new CAO, has commanded that. And again we've been pleased at how smoothly the integration has gone.

Okay. And then final housekeeping, which is just tax rate levels, 31.5% in the first quarter. I know there are some one-time items in there. Is that what we should be looking for going forward, that level?

Yeah. What we had said previously that the effective tax rate on a non-GAAP basis would be around 37%, and the thing that will drop that a little bit and that has dropped it a little bit is primarily the impact of the new accounting standard for taxes. And so as our stock price goes up, it gives us a book tax deduction, if you will, that puts downward pressure on the rate. So given where the stock price is today, if it continues in that trend, you're going to continue to see some downward pressure on the rate. But right now we're not quite ready to give you an updated full year tax rate, again for the full year.

Okay. Thank you very much.

Thank you.

Thank you.

Thank you. Our next question is a follow-up from the line of Jon Raviv with Citigroup. Please proceed with your questions.

Hey, guys. Thanks for taking the follow-up.

Sure, Jon.

Roger, you commented that 1Q beat your expectations on a number of fronts. Is it just a lack of budget certainty that's keeping you from increasing guidance, or should we think about this as more of a philosophical approach where you kind of want to wait until July or even October before adjusting your outlook?

Well, and Jon, we've been doing this a long time, and we just – if you think about it, we put out guidance with our year-end close, and here we are in first quarter. And philosophically we like to see more performance. If there was a big non-recurring that moved the numbers up, we would just pass that off in guidance, but typically we want to see a little bit more demonstrated performance, a little bit more run rate. But of course, as both Jim and I said, we're really pleased with the numbers that we've seen, and frankly a little bit ahead on some of the cost reductions and the restructuring, and revenue has held up well. Although I mentioned the competitive environment and some disappointments, we've also had great growth in our existing contracts, and our team has been able to expand some of our statement of work with some of the administration's priorities that can be covered by current contracts. So, again, we feel really good about the year. But it's the first quarter. And for us, without something really compelling, we want to get more demonstrated performance, better understand the budget, what's going on inside the Beltway.

And then briefly, Jim, can you just remind us, versus your guidance of at least $475 million of operating cash flow this year, what's the assumed CapEx? And then also what is the – what is the full-year impact of that increased working capital cushion related to innovation?

Okay. So think of our expectation for CapEx at around $60 million, which would be – remember the $475 million is guidance for what is cash flow from operations on the cash flow statement. So you got about $60 million there out of that on CapEx, and then the way we have thought about- what we've said previously the way we think about working capital assumption is about a three day increase from the end of last year to the end of this year embedded in that number, three day increase in DSO.

Okay.

Our next question is a follow-up from the line of Noah Poponak with Goldman Sachs. Please go ahead with your question. Noah Poponak - Goldman Sachs & Co.: Hey, just actually a follow up to that. What's the approximate millions of dollars in cash from ops related to a day?

I think it's $30 million a day. Noah Poponak - Goldman Sachs & Co.: $30 million. And then, beyond the novation reversal and the change in cash restructuring, is there anything else below segment revenue and EBIT that is a material change 2018 versus 2017 cash flow?

What we – we talked about CapEx is a little higher, obviously, because we're bigger that – that's $60 million that actually shows up in investing activities part of the cash flow statement, three days of DSO, and then we've also talked about the restructuring costs that show up in the P&L and their cash. So – and that will tail off early next year from a run rate basis. Noah Poponak - Goldman Sachs & Co.: Got it. And sorry, just a clarification on the CapEx comment. You're saying $60 million is higher because you're a larger- or your run rate something more than $60 million going forward?

Well, yeah. Before the acquisition of IS&GS we were running about $40 million a year. So, we're getting some great efficiency on a per revenue dollar basis with lower CapEx or a broader portfolio. Noah Poponak - Goldman Sachs & Co.: So something in the vicinity of $60 million is a good number to use for some period of time?

Yeah, that's right because – and the way we're getting that efficiency is much more effective real estate footprint. We're able to grow into some vacant space, as opposed to go out and procure new space and have resold improvements, et cetera on that. Noah Poponak - Goldman Sachs & Co.: And then one more, back to the order front. With everything you know, even recognizing that a decent amount of what you know is the degree of uncertainty in some ways, but I guess with everything you know, are you able to articulate a view on how orders trend as we move through the year or where book-to-bill shakes out for the year?

Well, no, I – in my prepared remarks we committed to book-to-bill greater than 1, which is where we've been for the full year. We've always been sort of a seasonal with the third quarter being our strongest with the appropriations bill, assuming it gets passed by the Senate today and signed by the President tonight, that will accelerate awards and I think we will see maybe even more seasonality into second and third quarter than we might have seen in prior years. And as we kind of plot through the bids outstanding, and think about what's happening in customer space, I think it confirms that we will see maybe a little bit more seasonality this year, which means probably our peek awards quarter will be third quarter. Noah Poponak - Goldman Sachs & Co.: Thank you.

Thank you, Noah.

Our last question today will be coming from the line – a follow-up from the line of Krishna Sinha with Vertical Research. Please go ahead with your question.

Hi, guys. I just want to make sure I'm understanding this correctly. It sounds like -you guys have previously talked about a 3% revenue growth going forward, it sounds like a significant portion of that is driven by contracts that you already have booked, specifically some of your Health contracts. Can you talk about, maybe break it down in terms of how much of that 3% is going to be dependent on new awards that you book, so sort of the second half surge in bookings that you're expecting, and how much of that is just driven by what you already have that's embedded in your contracts?

Gosh! When we've talked about 3% growth, we've talked about that as being more in the 2018 and beyond as we begin to realize some revenue synergies that we talked about back in August. These were things that as two standalone businesses neither company would have event bothered bidding, but now we can because of cost structure competitiveness and a broader array of capabilities to bring to our customer set. So, already at the beginning of the any given year, and this year was no exception, we already had visibility in the 80% of our work which was in backlog or high probability of win extensions of contracts. So, you have a go-get. And right now with where we stand on contract growth as well as the awards we have today, that again gives us the kind of condolence that Roger and I talked about relative to our guidance. So, I mean I would think about if you're asking to get to the 3% is that going to be more realized in things that still have to awarded and the kind of revenue synergies we've talked about, I think the answer is yes.

Okay. Great. Thank you.

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

Great. Thank you, Rob, and thank you all for your interest in Leidos and for your time this morning. Have a great day.