Greetings. Welcome to the Leidos First Quarter 2020 Earnings Call. At this time, all participants will be in 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 turn the conference over to Peter Berl, Investor Relations. Mr. Berl, you may begin.

Thank you, Rob and good morning, everyone. I would like to welcome you to our first quarter 2020 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 April 3, 2020. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our Company's strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. After these remarks from Roger and Jim, we will 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 supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com. With that I will turn the call over to Roger Krone.

Thank you all for joining us this morning for our first quarter 2020 earnings conference call. These are challenging times for all of us. And I sincerely hope that each of you and your families are both safe and healthy. First Quarter results demonstrated the resiliency of our business, as evidenced by strong pro forma organic revenue growth across all business segments, significant bookings and a new record backlog position. While the COVID-19 pandemic presented some late quarter headwinds, we are confident that the critical nature of our work, coupled with our early business contingency planning will mitigate any long-term impacts. In the quarter, the business delivered revenue of 2.89 billion, reflecting 12.1% growth from the prior year, adjusting for acquisitions and divestiture activity, the pro forma organic growth rate was 8.2% demonstrating the continued conversion of our successful business development campaigns to revenues. We delivered non-GAAP diluted earnings per share of $1.19 up 5.3% from the prior year. We generated $372 million of cash from operations and ended the quarter with a strong cash balance of $445 million. Net bookings of 5.5 billion yielded a book-to-bill of 1.9 for the quarter, a significant achievement compared to our historical pattern. With several recent favorable protests wrote resolutions on single award IDIQs. We expect additional bookings, as incremental task orders are awarded against these vehicles later in the year. Adjusted EBITDA margin of 9.3% was lower than prior year. Primary factors were late quarter COVID-19 headwinds, and a charge related to an international receivable. The impact of COVID-19 in the first quarter was approximately 15 million in revenue and nine million in non-GAAP operating income. As discussed during the fourth quarter earnings call. We closed the Dynetics acquisition back on January 31st. The integration activities are progressing as planned on a…

Thank you Roger and thanks for everyone joining us on the call today. I will start by sharing some highlights from the quarter and then I will provide some color on what we see as the potential impacts on COVID-19 for the remainder of the year in the context of our updated guidance. Beginning with revenue we are pleased with our strong start to the year. First quarter revenues grew 12.1% over the prior year and 8.2% organically continuing our growth momentum into 2020. The increase in revenue was driven by high levels of on-contract growth and increased contributions from new programs that ramped up during the quarter. These increases were offset by a slowdown programs related to COVID-19 which caused an approximately $50 million impact to the quarter’s revenue. Excluding this first quarter, organic growth would have been 10% over the prior year period. Adjusted EBITDA margins of 9.3% declined 80 basis points from the prior year quarter. The declines characterized by two events. The first was what I would characterize broadly as COVID-19 related particularly impactful in our Defense Solutions segment program's ability to perform coupled with the inability to recognize fee on the maintenance of ready state labor. This impact is approximately $9 million to adjusted EBITDA. The second item is an $8 million charge related to an international receivable. After adjusting for these discrete items, adjusted EBITDA margins would have been more in-line with historic company levels. Non-GAAP diluted EPS for the quarter increased $0.06 cents over the prior year to a $19 primarily reflecting a lower non-gap effective tax rate and lower share count. Operating cash flows of 372 million were above seasonal norms and reflects the continued diligent management of our working capital as well as the implementation of the accounts receivable monetization facility,…

Thank you [Operator Instructions] Our first question today comes from the line of Jon Raviv with City Group. Please proceed with your questions.

Hey, thanks. Good morning everyone. Roger, you talked about some of these items of there is demand disruption and then potentially some areas there could be demand disruption. Can you parse between those two dynamics? It sounds like it is mostly disruption, but you did mention some potential shortfalls that it could be with us for longer?

Okay. I'm trying to understand your question. Let me take a shot and if I don't get it. I think we were pretty clear both Jim and I that we don't see significant long-term impact as a result of COVID-19, which is what I think your question was. Most what we saw a little bit in Q1, but mostly in the month of April, except for the [3610] (Ph) fee, which we will never get back because we are only being reimbursed for costs not fee. We see almost all of that revenue when therefore earnings just moving to the right and we will either pick it up in third quarter or fourth quarter or in a roll into 2021. For instance, as you all know, we do a lot of work at hospitals, right. Our Defense Health program is installing the new millennium software and hospitals. Those hospitals are now being used for COVID-19 even those at military basis. As such, we are not getting access to the hospital right now. And so we are slowing down our deployment, but those deployments will still occur. They just move to the right by a quarter or so. And so in some program we will pick back up. In fact, it is already starting to gain momentum again and should be fully back in third or fourth quarter. So John, I don't believe I said that we saw permanent impairment of our business. And if you heard that in my comments, then I apologize. Clearly we have seen impact in the month of April, but the vast majority of our impact is either the earnings we lose on 3610 or revenue and earnings that have been delayed. Back to you Jon.

Thanks, Roger. I didn't mean to imply that you said, I just want to make sure we are perfectly clear on the disruption idea here. But I was getting at though and a real quick follow-up here is just, you did bring up the idea that going forward, how maybe in 2023, 2024, 2025 let's say, deficit starts to become more of an issue, discretionary spending could be pressured. I mean, you are a big business, but you are also operating in a big market. How do you think about the Company positioning for what that long-term spending environment could be? Because it is still going to be mission essential spending. But, how do you position for those parties and essentially what those priorities are going to be?

Yes, Jon we are really pleased with how we have repositioned the business over the last five years to be in parts of the market that we think are more resilient to what will be eventually a cyclical flattening of government spending. We have moved into mission essential digital transformation areas and have diversified from our concentration in DoD to where we now have essentially our four markets and defense until health and civil infrastructures. So we are really pleased with how we have restructured the company and how we have positioned ourselves for the markets going forward. And if the Department of Defense slows in growth, I think we will see a lot of civil infrastructure projects. How we do inspection at airports, is going to change with social distancing. And we are well positioned to take advantage of shifts and spending in that direction.

Thank you.

Next question is from the line of Matt Akers with Barclays. Please proceed with your question.

Hey, good morning, guys. Thanks for the question. I wonder if you could comment a little bit on the security detection business. I know, Roger, I think you mentioned you may be seeing some demands for forward during this fiscal period. But I mean, how much of that business you think of is kind of tied to sort of air travel run-rate and kind of just seeing sort of an unprecedented downturn there. And so how much of it is sort of that versus kind of longer cycle stuff that you have for booked already?

Yes, over the period of signing to closing. We have gone out and touched all of our traditional long-term customers and the new long-term customers that come to us by way of the L3Harris acquisition. We really wanted to understand what their capital spending plans were and what their view of technology was. And, again to U.S. this is funded through TSA. There are some markets where the inspection function is funded by ticket surcharges and it is a mix as you go country-to-country. What we heard across the board was movement in new technologies, social distancing at checkpoints, CT scanning, the addition of biometrics, which very, very few airport checkpoints have today whether that be facial recognition, temperature scanning. And really what has gotten us excited is I think this is going to spondee a recapitalization of checkpoints. We were talking to one customer that said we put ultraviolet lights in the tray return conveyor so that we could sanitize the tray as it comes back around and is presented to the next traveler. All of that is capital investments, all of that really plays well with the L3Harris business that we have gotten. And of course, our traditional business was very strong in ports and borders. And this only accelerates the need to do inspection at the ports and borders as we want to have control of the border. But we want to be able to tell you not only who is coming across, but now there are some aspects about do they have a temperature, things like that. So we were very, very excited about the L3Harris business, back when we signed the deal in early February, and the world events have only made us more excited.

Great, thanks. That is helpful. And I guess just one other on MHS GENESIS there has been you know a couple of press reports that there may be some delays in that program. Are those impacting you? And what sort of the run rate that you guys are at on that program long-term?

As I made my comment to Jon, because those hospitals and even the ones that military bases have been dedicated to COVID-19, or at least put in a ready state. So we have had to do more work off-Prem to get ready for deployments. And we are doing some other work on behalf of DHA as well with our team. But there has been an impact that we have seen slowing of our deployment. Maybe I will let Jim comment.

Yes. As you know there was supposed to be a peak in the deployment activity late this year early next. And now with the rescheduling, it is clearly that peak has been pushed out into 2021 as we re-jigger our scheduled to accommodate the use of the hospitals for COVID-19 patients.

Okay. Got it. Thank you.

Thanks Matt.

Thanks, Matt.

Thank you. [Operator Instructions] Our next question comes from the line of Robert Spingarn with Credit Suisse. Please go with your question.

Hi, good morning.

Hey, good morning, Rob.

Good morning, Rob.

Rob, you talked about the work that you do with NIH that directly touches on the pursuit of a cure or therapeutic for COVID-19. Could you talk about the materiality of that revenue where it stands now? And could that be a meaningful needle mover as we move forward? And then really, as a follow-up to that higher level, how should the market think about Leidos given that you have a healthcare segment? And just the long-term ramifications of the federal response to this disease.

Okay. Let me start with the easy one. The work we do at the Frederick National Laboratory for cancer research is part of our FFRD support contract and although we believe it is very, very important to the country, and it is a great past performance call for us. It has a never been for $12 billion, $13 billion company, a material set of numbers. So it is just not - and it has to do with the way that contract for FFRD are structured, and how we book. That being said, the work we believe is highly important and it provides credibility for us across our healthcare segment. And longer term we like being in the healthcare sector. We view that as a significant growth more market for us. It is, as you all have seen, our highest margin market, which says our customers value what we bring to the market there. And we continue to invest and to grow in that marketplace. And your question about the federal response. I will make this statement and I’m really proud of what the organizations that we work with have done in response to the pandemic. This is unprecedented and unpredicted and every organization that we work with, whether they are at NIH or NCI or frankly, our DoD and Intel customers have all leaned forward. We are doing virtual customer meetings by phone. We are doing Zoom Chats and across the board, there are a lot of people who are critical out there is not us. We are thrilled with all the hard work that all of our customers have done to try to keep our workforce employed and paid and to combat the pandemic and to take care of their employees and our employees.

I guess where I was going with that Roger was, once we are through this, if they set up some kind of a federal pandemic office to try and prepare differently, let's say for next time. How much of an advantage are you - does Leidos have versus the competition, given that you are already in the healthcare IT arena?

Let's see, we think we have a significant advantage. I’m part of why we do FFRDC work is to have knowledge of the environment and how therapeutics are created and how vaccines are created. Rob, as you may know, we are heavily involved in the Ebola vaccine and the worldwide effort to eradicate Ebola off the face of the planet. And although it doesn't generate significant profit the way some of our other large programs do, it gives us great credibility as we pivot to support what very well may be a federal response - a permanent federal response to future potential pandemics.

Thank you. Roger.

Thank you.

Next questions comes from the line of Cai von Rumohr with Cowen. Please proceed with your question.

Yes, thank you very much. So Roger, you talked about $270 million of COVID impact. And yet the guide has 370, which would imply about $100 million for other 'market certainties'. Could you give us some color on what those other market uncertainties are? And then of the $270 of COVID-related, walk us through some more specifics like the dim-some impact and some sense of the quarterly pattern. Because it would suggest the COVID impacts can be bigger in the second quarter than the first year.

Yes Cai, let me get started on that and I will let Jim pick up what I don't talk about. So the 270 is that from a bottoms up, we can tie directly to COVID-19. So 3610 CAREs act, slow down on dim-some. When we touch guidance, we sit back and go, Okay, what are the unknown unknowns? And although it hasn't happened yet, we think some of the procurements are going to slow down, and there is just going to be a little bit more drag on the business writ large. And when we touch guidance, we felt it was prudent to put another 100 million of revenue headwind in our guidance, and it is not specific. And I can't go into the additional, the 270, we can almost go contract-by-contract and Jim may touch on the major pieces there. The additional 100 for us is, I actually thought we were going to get an NDA this year. And now I don't think we will. I think we will be in a continuing resolution. So our forecasts are seeing a continued growing federal budgets and things operating in a normal way. And now I don't think that is going to happen, I think, procurement will slow down, the things will take longer, meetings take an extra week or two, there is no travel. And we wanted to put in another 100 million of headwind to get us to a midpoint, which was indeed our 50/50. A little bit of a quarter-by-quarter, Cai we don't guide by quarter. That being said, April must be the worst month, given what we all have been through. We have already seen, state start to reopen here in Virginia, the governor is talking about opening next week and non-essential. So we think that it May will be better and June will be even better. But if you are starting to face - now you know our first quarter, there is just no doubt that second quarter is going to be the quarter that is the most impacted. And then we expect, as Jim said in his comments, to be fully recovered, or maybe be better than by fourth quarter. Jim do you want to add some color.

Yes. Just a couple more comments. Rob, you characterized it exactly that 100 million is the piece of our revision that does not have any specific contracts tied to it, but it is that out of what we - Cai as you know, we try to be pretty conservative in how we guide and it was we thought the prudent thing to do. Some color on a couple of contracts we mentioned dim-sum. There is also, for example, we support the National Science Foundation in the Antarctic. The Antarctic is the one continent that has no COVID-19 today and they want to keep it that way. And so they have slowed down the level of activity that we are going to have down on the ice for the balance of the year and so that is - now there are some big programs down there that we are going to manage. And so that is what is into 2021, like a lot of these impacts. And then there is a part of our business a couple of contracts that have a lot of fixed costs, and they are also fixed unit price. And that downdraft that is going to be temporary in the second quarter, obviously, is going to impact both revenue and margin in Q2. That said, those customers that procure those products and services from us, have already contacted us about their restart plans. And we are working with them closely to begin re-ramping back in the second quarter. And we expect that we will be in much better shape there on the third.

Very helpful. So you mentioned protests, could you update us on the next gen protests, and also the UNH Defense Health takeaway win?

Yes, well you know right now, we are in the throes of finishing and have recently finished all the back and forth and responses on the engine protest. And right now we continue to expect that that will be concluded in the second quarter. And as we said before, we are pretty confident of that outcome. And that would result in a booking in Q2. And do you have another one in mind, Cai? I'm sorry.

Just UNH Defense Health. Take away when?

Is that the reserve health program, Cai?

Yes.

Or [RHRP] (Ph).

Yes.

Yes. We call that our RHRP. Right. Well, that is in protest as well. So and two more months from where we are.

Yes. And that should also be resolved by the end of the second quarter Cai, and so we will have something to say about that on our next call as well.

Thanks so much.

Okay.

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

Hi, good morning.

Good morning Ed.

Good morning.

I was wondering how much of your revenue guidance is a function of requests for equitable adjustments, if that is a meaningful factor that you need to recapture?

Ed, this is Jim. The REAs right now are in the forecast very conservatively like zero. It is not our habit to include those in revenue projections mainly because the timing of resolution of those is pretty difficult. With that said, we have had a number of customers, I can think of one customer in the Health Group and a couple of customers in the Defense segment that has invited us to prepare a request for equitable adjustment for things like the fee on COVID standby labor pre-March 27th, which isn't provided specifically in the CAREs Act. But our customers do understand that there is some significant loss of profit. So the pursuit and successful closure of REAs, if it happens this year would result in some upside to the numbers that we have out there.

Great. Can you also talk a little bit about your clients' behavior on a word activity and whether you are seeing bridges and extensions in the current environment? Thanks.

Ed, thanks. I will start on that. To-date they have awarded pretty much on time And almost to our surprise, and like the human lander program out of NASA really was right on schedule. That being said, part of the $100 million that we add into our revenue guidance is conservatism on our part that may not continue as we go throughout the summer. And just the RFP process where maybe we used to do oral face-to-face and now we are going to have to do orals by video. We just think that is going to take longer. But as through today, we have not really seen anything that I would call an appreciable delay. And in fact, on our L3Harris deal or Hart Scott, we got early termination. So the government is up and operating and things are moving forward.

Thank you.

The next question is from the line of this Seth Seifman with JP Morgan. Please proceed with your questions.

Thanks very much and good morning. I was curious on the airport security acquisition, there were the presentation that you guys did when the deal was announced back in January I think, when you look at that now, should we still be thinking about the same types of numbers for around for 2020 and the out years or kind of when you look at things after the cause?

Yes, thanks for the question Seth. When we took a look at this business, most before COVID and really very recently, in doing our due diligence update, we saw that the business was up through the beginning of COVID. The business was outperforming our own projections and pipeline and backlog as we recently looked at it still looks good. As Roger mentioned, we had an opportunity to touch-base with many of their major customers. And we were pleased that they are continuing with much of their plans. And in fact, we are thinking about how to reconfigure some of the systems that the L3Harris business has already sold to accommodate the need for more lanes, for example, because of the need for slower testing, as airline customers go through security dimensions by the way of example. Now with that said, there will undoubtedly be some slowdown in the revenue and just because of the inability in the short run to get some of the work done, but it hasn't changed our view of what the order backlog of the business is. So, and those provisions have been incorporated into our guide for that business for the rest of the year.

Yes Seth. I just want to add, if you were going to take a word out of what we have heard, the word touch less is what we are hearing from customers about the transit of passengers through security checkpoints. And every customer we have talked to is said, we have been doing this in a highly personal, highly contacted environment. And going forward, we don't want to put, for instance in the U.S. our TSA agents at risk, and we don't want to contact the travelling public and if you recall your experience back when we all flew, depending upon what happens, you were touched, and especially if you get a pat down, you might be touched three or four times through the checkpoint, and that is just going to be unacceptable going forward. So the TSA agents not going to want to hold your driver's license, right? They are going to want a another way of verifying who you are. You are going to put your material in a bin, before you put material in another bin, you want to know that bin is sanitized, right? If you need it be go through a secondary, you want to do a secondary in a way where a TSA agent doesn't actually have to make a contact with you. That means CT at the checkpoint. So a lot of great application of technology to the checkpoint of the future and again, we are excited about the opportunity to grow the business that we bought.

Okay. Thanks that is all I have.

Next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Hi. Good morning, Roger and Jim and thank you for the time. Roger, I wanted to follow-up on Bob's question with regarding the healthcare opportunity. Not only on health care, but maybe IT infrastructure just given government employees are also working from home. Kind of where are we in terms of timing with these opportunities? When do they emerge? Are we in step one in terms of tracking and tracing? Maybe Can you talk about that?

Let me start with the easiest and that which we have already seen a positive impact. Sheila as you know we provide IT infrastructure and digital transformation for a whole host of government customers from CMS to the Pentagon. We are the telework provider for a significant part of the government. In fact, I will recount a story a agency director elected to work at home. And that director had never worked at home before. And we are the infrastructure for that particular agency. And so we facilitated that individual's work at home. We configured a laptop, we made sure that he had enough bandwidth at home, we provided user support and that has been going on across our IT transformation contracts. And that is immediate. It is not really in our guide. And we really don't know how it is going to come down to the bottom line, but we are seeing that across the board and even more so in the health world. Telemedicine is going to be a big deal. And we view that both in the short-term and the long-term. And then I think, John's question was where or Rob’s was really focused on, we used to have a pandemic working group and that team just gone away. We all know that is going to come back. And we have seen a global viral outbreak every seven to 10-years. So we know this is not here - there will be a COVID-25. And we expect that the federal government and organizations like NIH and NIAID will mobilize to put in a better response capability. And I think for us, that is a significant growth opportunity.

Okay, thank you. And then maybe one follow-up on defense. When we add back that international receivable margins are still around the low 7%. So it implies a bit of a ramp. What is going on in terms of profitability in that segment?

Yes, Sheila the profitability in the Defense Group while we did have that unusual item, we had to record. If you take a look back in Q4, you might recall that we had a big write up on a couple of programs in Q4. We keep thinking of that as being a business that should be running longer term eight-ish or a little north of eight.

Okay. Alright. Thank you very much.

Thank you.

Thanks Sheila.

Thank you. At this time, we have reached the end of our question and answer session and I will hand the call back to Peter Berl for closing comments.

Thank you, Rob. Thank you all for your time this morning and for your interest in Leidos. Look forward to updating you again soon. Have a great day.

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