Greetings, welcome to Leidos Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I will now turn the conference over to Kelly Hernandez from Investor Relations. Ms. Hernandez, you may begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter 2019 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team. Today, we will discuss our results for the quarter ending June 28, 2019. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our Company strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. 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 second quarter 2019 earnings conference call. Our growth momentum continues to accelerate through the second quarter with nearly 9% organic revenue growth, a record backlog position and strong win rates. Our success in executing against our pipeline and driving growth across all segments of our business enables us to raise our full-year guidance for both revenue and earnings. In addition, our recently announced dividend increase demonstrates the confidence of the Board of Directors and the management team and the strength of the company's cash flow generation and ability to sustainably generate value for our shareholders. Importantly, we achieved key wins during the quarter that increased our backlog to $21.7 billion, reaching a record level that also serves as a leading indicator of our future growth potential. These successes resulted from our strategic focus on delivering innovative solutions to our customers and leveraging the scale of our organization, a couple of highlights from the quarter's awards. We successfully defended a protest on our takeaway win with NASA's End-User Services & Technologies program or NEST. Under this contract Leidos will provide, managed, secure and maintain essential IT services that support the agency's core business, scientific, research and computational abilities. The single award contract has a total potential value of over $2.9 billion over the ten-year period of performance. We also successfully defended a protest on another takeaway win with the Air Force Air Combat Command to support the war fighters intelligence, surveillance and reconnaissance mission through intelligence gathering, analysis, distribution and training across the ACC enterprise. This single award task order has a total ceiling value of approximately $900 million if all options are exercised. Business development remains a key priority of the company's strategy and we have…

Thanks, Roger. And thanks to everyone for joining us on the call today. In summary, we've achieved continuing strong execution across all of our segments. Our revenue growth of 8.8% over the prior year is the highest organic growth we've seen in several years driven by new program win and accelerated on contract growth. We were able to deliver the strong growth while maintaining adjusted EBITDA margins of 10.0% in line with our long-term targets. Lower profit write-ups were the primary driver of the year-over-year margin compression. This is reflective of our revenue composition that is more heavily weighted to early phase programs as we have discussed previously. Non-GAAP diluted EPS increase $0.04 over the prior year to $1.16 primarily driven by the lower share count resulting from our sharing purchases over the past year. Operating cash flows were $186 million reflecting 110% conversion of non-GAAP net income. We had another great quarter on the business development front booking over $3 billion in net awards into our backlog including significant contribution from takeaway wins. Takeaways in new business represented nearly 70% of the bookings for the quarter and more than 60% of bookings year to-date. Our ending backlog of $21.7 billion is up 18% over the past year and 27% over the past two years, highlighting the success of our business development strategy and our scale advantage. In the quarter, we submitted 10.3 billion of proposals which after accounting for some large decisions adjudicated in the period resulted in 30 billion in submit pending decision at quarter end. Now for an overview of our segment results. Defense solutions grew 6.7% over the prior year quarter as new program revenues more than offset program completion. Non-GAAP operating margins of 8.6% decline 20 basis points from the prior year largely related to…

Thank you. [Operator Instructions] Our first question today is from the line of Shelia Kahyaoglu with Jefferies. Please proceed with your question.

Good morning and thank you. Just a big picture question for you Roger first, I think you mentioned the $30 billion pipeline this quarter. You had $36 billion, last quarter very large numbers. Maybe can you comment is this an overall industry trend where you're seeing bigger award sizing or is the consolidation resulting in more bids per program?

I really can't speak to what's going on with other companies. We have stated for a long time that we wanted to pursue larger programs and by growing and adding the scale that we have we now go after fewer programs but larger in the amount. And I will tell you for Leidos it is trend that we expect to continue. I think you have to go company-by-company to see what everybody else is doing. But -- and I think you had a second part which is sort of like is, do we see the customer aggregating or disaggregating. And it's interesting they kind of they go in waves, and we see them aggregate. And then we have another program that we've had for a long time which they're going to break into a couple pieces. Maybe NextGen is an example where the old NCMI was one contract and they're essentially going to break it into two. So it just comes and goes. But for us our strategy has been to go after larger programs.

Make sense. And then maybe a follow-up to that on NASA, NEST now that the protest is over. Can you give us any color on how we think about the ramp of the program, the potential to go to the high end of that, so I think $3 billion number and just a profit impact?

Well, this is Jim, Shelia. Thanks for your question. I think that the best way to think about the ramp of NASA NEST is first of all, we take that into the bookings number by task order and that that will be something that is going to ramp over the next 12 to 18 months. The profit profile net program is pretty consistent with what our overall average is. We don't normally comment with very specific numbers on the profit margins on a program-by-program basis, but I think it's fair to say that you can think of the NASA NEST program is being relatively consistent.

Thank you. Thanks for the color.

Thank you.

The next question is from the line of Rob Spingarn with Credit Suisse. Please proceed with your questions.

Hi. Good morning.

Hey, good morning, Rob.

So, Roger, I wanted to hone in on the growth here. It's obviously a theme in the sector. It's come on quite strong. You guys talked about it earlier. And at the same time I don't want to pour any water on this. But I wanted to reconcile your 3% to 4% type numbers that you referred to earlier with the fact that the budgets are beginning to flatten. I understand there's going to be some lag, but could you talk about your growth projections and your assessment of the market in the context of a FYDP that's kind of flattish especially when we look at this 2021 budget flat with 2020?

Yes. 3% for defense, 4.5% for non-defense and of course, we have to do the analysis underneath that and you have to look at two components. How long does it take budget to roll through the PBS system to become outlays? And that can often be 18 to 24 months. So when you get a strong budget in 2020 and 2021 it gives you momentum for a couple years. And then you then you have to dissect both the defense and the civil budget and look at where the spent is and what kind of accounts are growing and what accounts are shrinking. And we're seeing a lot of favorable movement for us, modernization, digital transformation move to the cloud, back office efficiencies, consolidation really across federal government with large. So – and we've always said there, the budget overall is going to be kind of bounded by that three, four percentages which just can't go up forever. But we're very pleased by the strength that we've had over the last couple of years, the strength going forward. And then where we see increases, obviously agent by – agency by agency and then accounts within those agencies.

Okay. And then on that could you maybe delve into some of the larger program opportunities and any roll-offs and perhaps you can comment I think maybe NextGen just came up but of course with the change in structure and the bit of a lag we talk about that one little bit?

Okay. I'll start with Navy NextGen which is NMCI. We are bidding on a portion of that called SMI TTY [ph] which really is more of the architecture in the network as opposed to buying the equipment where we had hoped that that would be up for award. I think the Navy has gone back and looked at their procurement and is making some adjustments to the solicitation and we expect that now probably will go to next year and that we won't see an award on Navy NextGen till 2020. That's my best guess at this time. Rob, we have two other large bids outstanding, I'll just touch on those, A Hanford Department of Energy recompete and we're hopeful that's within a couple weeks maybe one time it was supposed to be on the 29th, I actually think it's going to be a week or two behind that. And then our large infrastructure program at DISA, that we call the Global Support Management Organization or GSMO. And that is probably four weeks, six weeks-ish. We are still hopeful that there will be an award made probably in the third quarter and then you just have to think about protests and things from there, when that actually might enter into someone's backlog.

Okay. Anything going the other way? Anything rolling off way?

Well, of course, NASA NEST came off and so that hurt our submits, right, because it went from submits to award. We talked about ACC ISR, those are the big ones in the period.

Okay. Thank you very much.

Thank you.

The next question is from the line of Cai von Rumohr with Cowen & Company. Please proceed with your question.

Yes. Thanks so much and good quarter. So NASA NEST and the ISR program, both are big but they both are IDIQ structure. How much did they actually contribute to your 3 billion of awards in the quarter?

Cai, this is Jim. You can think of those contributing to the additional backlog is a little bit under $1 billion between the two of them.

Got it. Okay. And then could you give us some color if we exclude GSMO, what's the booking environment that you're seeing kind of over the last couple of weeks in your anticipation of the third quarter which normally is a seasonal peak?

Well, Cai, we were pleased that -- really more to protest activity that we had a nice second quarter. And in fact, we still have the rest of the week to go in the month which is really third quarter, but looking at and July has been a good quarter, although we're still waiting to see how it ends. But you're absolutely right, third quarter has always been cyclical high, and we – I have no reason to believe that that would be any different. Again, we're pleased by the budget action and you just get a sense that a lot of the federal agencies really want to get decisions made before the end of the fiscal year. And now with budget certainty there is no reason for them to slow down. So, we expect most of these things to happen. Albeit, Navy NexGen is going to go through some revisions and I don't think I can be able to happen in fiscal year.

Thank you very much.

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

Hi. Good morning. Congrats on another set of good numbers here. You mentioned good win rates. Could you frame that a little bit more sort of what levels and how much improvement? Thanks.

Yes. Ed, as we've said before we don't give specifics on or details on win rates. But qualitatively the way we think about is that there's only been really one significant disappointment this year to-date on recompete other than that the recompete win rates has been kind of what we would really like in the main roughly with the exception of one thing if you curve that out its roughly high 80s around 90%. But things that's been most notable and the thing that I think can help contribute to both the current revenue growth being above what you would think of coming from normal budget increases, as well as our prospect for the rest of the year and into the future. It really has been our success in new business and takeaways and helping to get a little bit of -- or some nice share growth. And so, normally you think of takeaways is being kind of the converse of recompete, right? So, if you think of -- a lot of companies think of a good number for takeaways as being in somewhere between 20% and 30%. Our takeaway win rates have been well in excess of that and our new business win rates have also been well in excess of the 30% to 40% that I know a lot of companies target. So I'll leave it at that.

Great. My other question is, you mentioned strong net headcount adds, can you tell us a little bit more about your attrition and then split it sort of capital region and outside of the capital region? Thanks.

I think both Jim and I'll comment on that. Our attrition is cyclically down, it still not as low as we would like it to be. And it's really focused effort for us. We have broken it into what we call voluntary and involuntary and we have fought really really hard on what we call involuntary and that's when a contract comes to an end and we have trouble redeploying because of geography or skill set and we're really really working hard with our team, our leaders and our employees to more aggressively redeploying the employees. And then voluntary is down – not where were I think any of us would like it to be. And I would say, in the national capital region, probably the hottest market for the type of skills that we hire, but we have been pleased with our ability to hire people and to retain people and they are clearly isolated groups that do have a high level security clearance and you live in the Maryland area that's probably the hottest commodity. I think it's just going to remain that. We've had a strategy that we've talked about in the past of when the contract permits us to do the work beyond the 25 mile radius, then we move that work to other sites where our retention is higher and that has been successful for us. We have places in Morgantown, West Virginia and Charlotte -- Charlottesville and frankly St. Louis and Eagan, Minnesota were people tend to stay longer and enjoy the kind of work that we do.

Great. Thank you.

The next question comes from Matt Sharp with Morgan Stanley. Please proceed with your question.

Good morning, gentlemen, a nice quarter.

Thank you.

I just wanted to touch on the budget here for a moment, obviously going into 2019, it look like a CR was likely are going to play out in 4Q, but at this point where negotiations are with the Congress and the President that might no longer be in the cards. If we do get a deal prior to October 1, how does that impact 4Q revenue? Is there upside there or just – what's the playoff between revenue and the budget dynamics at this point?

Yes. Matt, I wouldn't say it's significant. I'm not even sure that you would adjust your model. I'll just talk about the behavior. If you're a government program manager and you have to operate under a CR you're really restricted in what you're going to do relative expanding your statement of work. And with an authorization bill and hopefully appropriations –and by the way, I think, we will get most of the bills done. The DHS Bill may languish and may take a little longer, but I think they will spike that out. So it encourages what we call a normal order, which obviously has been anything, but normal, and people will now spend the money that they have been obligated. And I think it stabilizes, it gives us a slight lift, but I think it adds confidence and certainty to our third quarter, fourth quarter revenue. And it really let us look at the election season with a lot more confidence. There is going to be -- I think there's another debate tonight. There is just going to be a lot going on and the elections tend to be the sport in the U.S. And the good news is, we've taken sort of budget battles off the table, and that's great for our customers and their ability to do their mission and conduct the work of the nation.

Got it. Thanks. And then, just a quick one on competition. Over the last couple of years, obviously, some of your peers have been playing catch-up in terms of scaling of their businesses, but at this point, there are some other notable names with substantial size. I was wondering if you're beginning to see elevated competition for some of the larger opportunities that they may now be able to pursue. Has there been a change in behavior or more names bidding on the same programs at this point?

Let's see. First of all, I would tell you that, it's always been very, very competitive marketplace. I mean it's just unbelievable and which is the world that we live in. In the five years that I've been here, it's always very, very difficult, and you really have to put your best foot forward. You have to be really, really good at presenting your technical story. I would say, because of consolidation, we have seen maybe the number of bidders, where it might have been five, now they are four, right, or maybe, it goes down to three especially for some bids, but that doesn't reduce the amount of competition. As I learned in my prior career, sometimes you only need two competitors to have really robust competition and we have found it here, but I wouldn't say, it's gotten worse, I think it is about where it has always been and it motivates us to come up with great solutions that are differentiated from our peers and to be able to articulate those well in the proposals that we write and present to customers.

Got it. Thank you.

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

Hey. Good morning. On capital allocation, so you've got the dividend increase, but repo was a bit late in the quarter, with your stock being at all-time highs and also you've previously highlighted M&A opportunities now that IS&GS is integrated. So I guess, big picture question on those, how are you evaluating organic versus inorganic versus repo at this point?

Jon, we've been maybe mind numbingly consistent in how we've talked about capital deployment. We've mentioned it in the prepared remarks and we'll do the same. We spend our first dollar internally on organic growth and we try to use that to support customer mission and we're always thinking about creative ways that we can do that. You saw a little increase in capital because we were able to deploy some of our balance sheet to support customers. We are, whatever active in M&A might mean, but just as we look at a lot of opportunities, we think that's a prudent thing for us to do. We're always thoughtful about how we spend your money. We want to make sure that we create long-term value that is sustainable, not just over a couple of years because with interest rates today, almost every deal is going to be accretive in the short-term. We want to make sure from like a DCS standpoint that we see true value. And we hope that there'll be some deals out there that will align for us, but if there isn't, then just we will return the capital in efficient ways to our owners. And as we've always said, that dividend is very, very important, couldn't be more pleased. We had to go back and check, but we found out we never actually increased the dividend. And so, it's kind of remarkable thing and hopefully everybody will enjoy that. And then, we have obviously been committed to share repurchases and that's in our toolbox as well.

Okay. Thank you. And then, as you see growth opportunities really pick-up here, how does that change the way you consider where else you can spend the cash, specifically on investments in working capital, CapEx or some more internally funded R&D?

Yes. Hi, Jon, this is Jim. We're always analyzing where we get the best return and we over the past 18 months we've increased our run rate on how much we spend on investments in new business funds, meaning marketing and bid and proposal cost. And in addition to that, part of that investment has made the deployment of that money much more efficient, so we're able to bid on more for the same amount of money. So we've had some nice returns on those investments. Getting to the inorganic side, I want to underscore what you -- I think, you just should have heard from what Roger said, which is that, our process to look at those opportunities is ongoing. We've got a team of people that's evaluating opportunities and it is in a very disciplined fashion. And so, you don't mistake the lack of meaningful M&A announcements from the Company, meaning that we're not actively looking and that you should not be surprised if you hear something from us in the coming six months on something that's strategic, it's meaningful, and it meets the financial criteria that we are going to continue to stick to before we undertake anything, any big transaction. And as Roger said, we will continue to keep share buybacks in our toolbox for capital deployment.

Thank you.

Our next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question.

Good morning. Jim and Roger, you guys have sounded pretty bullish for the past several quarters. It seems like on your takeaway win success. I'm just wondering if you could probe a little bit deeper in terms of what's driving that, is it past performance, price kind of the tactical offering, where are you seeing the best performance there? And please don't say all three in your answer.

Yes. Okay. Let's just kind of go back and look at the journey that we've been on. When we were fortunate enough to close the IS&GS transaction, we talked a lot about being able to reset their cost structure of that traditional business. And so we would tell you that price. We were able by bringing them into our cost structure and then taking advantage of the combine scale. We've been able -- not that we never lose on price, but it is not the number one reason that we lose. And that helped -- that we saw an immediate shot. But what has really helped us is kind of going back to our roots, investing in what we call IRAD, winning CRAD from the SNC agencies that helped to develop technology that we then deploy against the larger programs, what we call the programs of record, which have fueled our growth. And every time we write a proposal, we ask ourselves the question, what are we offering the customer that is unique and differentiated to our offering. And then, we've got a great team behind that that continues to refresh the technology that we generate to help us create that differentiated offering. So, we want to win on our technical approach. That's the Company, that's the core of the culture that we have here, and we're now in a position where -- and by way, obviously, we don't win everything. There is always losses and there are losses I wish that we had won, but we are pleased with the improvements that we've made in our win rate based upon differentiated technology and I think that has been the difference for us.

That's helpful. Thank you. And then, Jim, just from a recompete standpoint, is there anything to call out as unusual next year, or is it just the normal level? Thank you.

It will be back to the normal level for next year. This year, we've got some of those big ones. You've heard about Hanford and GSMO earlier in the call, but we're not going to have nearly as many big lumpy recompetes that are going to be submitted next year like we do this year.

Thank you.

Our next question comes from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions.

Hey. Good morning, everyone.

Hey. Good morning, Gavin.

Hey. Guys, if you look out over the next few years, what would you say is the gating factor for your growth? Is it the amount of work you can win? Is it the rate at which you can hire? Is it the budget dollars that the government is able to get passed and how is that different than the last couple of years?

Well, it's not been win rate and it's not been ability to hire. What has been a great journey for all of us is our ability to address new markets and we've been able to do that with the addition of the IS&GS organization. They brought long history and long relationships with customers that Leidos didn't have. So that expanded our addressable market. And I think to maintain the clip, we have to continue to think about how do we continue to expand that addressable market, but not just to new customers, like new federal agencies, but within a federal agency that we've had a long relationship with to expand our offering across their directorships. And it's cross selling, so we've sold a capability to one agency and then how do we take the lessons learned from the work that we've done for that agency and use that to expand our offering at a second agency for which we have a relationship with, but we have not traditionally sold them that kind of a solution. But people, new business funds, our ability to win, our scale, we're nowhere near being constrained in those regards.

Got it. That's helpful. And I think we haven't talked about JEDI in a while. Just maybe any updated thoughts on the aspirations of non-traditional companies in the space, whether there the threat has increased or there is more opportunity in your view to partner with them on something like a JEDI roll out?

Yes. Well, of course, we're not a bidder on JEDI and our prediction is that JEDI will go forward and there'll be award made relatively soon. We have done digital transformation cloud hosting with all of the cloud providers. We work -- we have AWS certified people we have Azure certified people. I would say that we have great relationships with all of the offers and with the eventual customer. And we just see this as a way for our customers to reduce the cost right off IT spend and be able to change the tail ratio of the amount of money that the customer spends to operate their back offices by providing mission capable programs that further the goals and objectives of the agencies. So we're thrilled. And again, all the competitors have reached out. They look for mission partners like us to come in and help the customer better utilize their cloud hosting capability.

Got it. Thank you.

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

Thanks. You commented a couple of times on questions about the size of contracts and competition. I was wondering at the segment level, if there is an echelon of contracts beyond the Company's easy reach now or you can attain everything you want at the scale you are in those segments?

Let me answer the question I think you asked, and if not, follow up. So, although you might view Leidos at the corporate level as having scale. The question is, in the four segments, are they large enough for which they also have scale, and therefore, are free to bid on any size of contract that they may see in a customer space? And the answer is, absolutely. And I would further comment, that's true in the U.S., it is also true in the United Kingdom and Australia, where we have significant operations and in a few other select countries, where we feel we have reach back and the scope and the scale that we can go after hundreds of millions and billions of equivalent U.S. dollar work. And what we have really strive to do at the Company is to create an environment where collaboration is natural. And so, if the Health Group feels like maybe in machine learning they don't quite have the depth that they need, they talk to the CTO and we have a CTO Council across the Company and they will seek out machine learning capability in the other groups and in the LInC, our Leidos Innovation Center, and they'll be able to pull that across. And that has really contributed to some of our success as of late, is the ability to leverage what all of Leidos knows in going after competitions.

Thank you. Could you comment on the ramp and expected contour of GENESIS? And then, Roger, I was curious, could you also maybe tell us what is the pitch to prospective employees as to why they should choose Leidos as an employer?

Yes. Okay, great. And we're near the end. I'll try to go quick. First of all, on the GENESIS program, we are now actively involved in two wave deployments and by the way, they are no longer sequential. We've kind of changed the orders. So we're implementing a wave one and wave four. And so, we're fully involved and those wave four began last week of June. We expect to add another wave about every three months. And that means for the next probably three years, maybe more than that, we will have two waves ongoing. And so that says that we should see a ramp in 2019 and the peak activity occurring probably late 2021, or early 2022. We have agreed with the customer on the deployment schedule. That has been locked down. We've got a great team. Our DHA customer has been really, really supportive. We're making terrific progress. So that program is really hitting its stride. On why people come to Leidos? We like everything we do, we do surveys, we talk to employees on the way in. We also talk to employees who leave. We think there are three reasons that people come. First is, they love the nature of the work that we do. We have a mission. We support very, very important customers, most of which are at the national level, whether it be social security payments, national security, Intel organizations, transforming health in the United States, our employee love that. Second is, they love the professional environment and the people that they work with, so great people attract great people. It is a cycle that we just love. And then, the third is, they come here for professional development, the opportunity, our continuing reeducation programs, our certificate programs, the ability to grow their skill set, to be lifelong learners and to be rewarded for their performance, and frankly to see the growth of the Company, which creates opportunities to do more, to work on larger programs, to have more responsibility and eventually, to move up the organization and be a leader at Leidos.

Thank you.

Thank you. We have reached the end of our question-and-answer session. And I will now turn the call over to Kelly Hernandez for closing remarks.

Thank you, Rob. Thank you all for your time this morning and for your interest in Leidos. We look forward to updating you again next quarter. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.