John Sweeney - SVP, IR Roger Krone - CEO Lou Von Thaer - President, National Security Sector Mark Sopp - CFO John Thomas - CSO

Edward Caso - Wells Fargo Cai von Rumohr - Cowen & Company Chris Sands - JPMorgan Jason Kupferberg - Jefferies & Company Bill Loomis - Stifel

Thank you very much and good morning everyone. I'd like you to welcome you to our second quarter fiscal year 2015 earnings conference call.

Joining me today are Roger Krone, our CEO and Mark Sopp, our CFO and other members of the Leidos management team. During the call, we will make forward-looking statements to assist you in understanding the company and our expectations about future financial and operating performance.

These statements are subject to a number of risks that could cause actual events to differ materially and I will refer you to our SEC filing for a discussion of these risks. In addition, statements represent our views as of today subsequent events and developments could cause our view to change.

We may elect to update forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I'd now like to turn the call over to Roger Krone, CEO of Leidos.

Thanks John. Good morning everyone and thanks for joining us on the call today.

This is my first conference call as CEO of Leidos. I would like to thank the Board of Directors for my recent appointment.

As some of you already know, my last position was at Boeing, where I ran the Network and Space Systems Group. So I'm no stranger to the defense and intelligence market.

And in addition, I've experienced running businesses that served civil and commercial clients. I'm excited to be here.

This is a company with a long tradition of leadership and developing technology based solutions to solve important complex problem. We do well in large complicated spaces that require us to understand regulation and to be able to navigate detailed and intricate procurement processes.

A Competitive advantage of this firm is our high degree of customer intimacy, a fact that I find alive and well in the seven weeks I have been here. This morning, we announced our financial results for the second quarter of fiscal year 2015.

Despite the one time non-cash accounting charges recorded in the second quarter associated with the impairment of prior acquisition, goodwill and intangibles Leidos delivered underlying solid financial results most notably driven by our National Security and Federal Health businesses. Revenue declines moderated from down 18% year-over-year in the first quarter to down 10% year-over-year in the second quarter.

Non-GAAP EPS excluding the goodwill and intangible charges increased 15% compared to the prior year and was reported at $0.61 per share. Cash flow from operations improved significantly from Q1 to $124 million and our overall cash position at the end of the quarter exceeded $350 million bolstered by the receipt of an $80 million cash grant payment for Plainfield.

In the second quarter, we experienced a deterioration in revenue and in the sales pipeline for our Commercial Health and our Commercial Engineering businesses, which caused us to reappraise the competitive market and the long-term forecast for both of these businesses. This resulted in a lower earnings outlook and subsequent formulaic reduction in the accounting valuation of goodwill and intangibles in our health and engineering businesses.

When we determined that the accounting value doesn't support the goodwill and intangibles on our balance sheet, we are compelled by accounting rules to take an impairment charge and reduce these account balances. This is what we did in taking the $486 million non-cash impairment charge to our goodwill and the $24 million impairment charge to our intangibles in the quarter.

Reduced health and engineering performance and further delays at Plainfield are the primary reasons for lowering our 2015 guidance for earnings and cash. Leidos guidance is now revenue unchanged at $4.9 billion to $5.1 billion.

Non-GAAP earnings lower the $2.10 to $2.30 per share and cash flow from operations lower to at or above $300 million approximately in line with the reduction in earnings. Leidos National Security Sector, an attractive business with a solid foundation, good earnings and cash flow characteristics performed well in the quarter.

NSS revenue declined by $94 million or approximately 9% year-over-year with the majority of the decline due to the continued reductions of the U.S. Overseas Contingent Operations or OCO revenues.

Excluding the OCO decline, NSS revenues were down only about 2%. National Security Sector operating income performance continued to improve increased by $6 million year-over-year and delivering a sector operating income margin of 8.4%.

NSS net bookings for the quarter were $550 million resulting in a book-to-bill of 0.6. Some notable wins include the $250 million National Oceanic and Atmospheric Administration IDIQ contract to improve hydrographic surveying services.

A $25 million IDIQ contract to provide systems, engineering, technical and management support services for the U.S. Navy Space and Naval Warfare Systems Center, Atlantic and other contracts for the U.S.

National Security and Intelligence client totaling $445 million. Moving to the Health and Engineering sector.

I would like to start by saying that the goodwill and intangible charges do not in anyway affect the enthusiasm we have for being in these two markets. Longer term that is one that is seeing increased government involvement and is starting to require the big data and analytic capabilities that we currently provide to the intelligence and defense customers.

This is a market where Leidos has significant opportunities that we are committed to competing and growing in this market. In the quarter, our Federal Health business performed well and we continue to be a partner with the Department of Defense in delivering electronic health records to our soldiers, sailors, airmen and marines.

In Engineering, there are attractive elements in this business as well. Security products for example as successfully expanded to an international presence with a high proportion of recurring revenues and strong profitability.

Our energy projects, financial consulting practice is among the industries most admired. As we have highlighted in our prior releases, other businesses like renewable energy projects are weaker and will be a smaller part of our engineering business in the future.

Health and Engineering sector revenue decreased $64 million or 14% year-over-year primarily reflecting the completion of two energy design build inspection project in fiscal 2014 and lower sales volume in our commercial health business. Excluding the intangible and goodwill impairment, health and engineering operating income margin was 7.3% and this includes $9 million of operating loss on Plainfield or about 2 percentage points of margin erosion in the quarter.

As I mentioned, Plainfield experienced extended shutdown in the quarter. We took advantage of this stoppage to upgrade equipment and improve a number of processes.

As a result of the stoppage, Leidos received very little revenue from the power plant in the period and therefore our operating losses were higher than we anticipated. The Health and Engineering sector had a book-to-bill ratio of 0.9.

Some notable wins include Center for Disease Control and Prevention, a $44 million single-award task order to provide development, support and maintenance of the National Healthcare Safety Network, a prime contract by Ameren Illinois to implement business and residential energy efficiency program. This single-award time and material contract as a three-year period of performance and a total contract value of $55 million and the U.S.

Army Armament Research Development and Engineering Center and IDIQ contract with a total value of $300 million. Looking at our consolidated business development results across both sectors.

Net bookings totaled $889 million for the second quarter and produced a book-to-bill ratio of 0.7. We ended the quarter with $8.4 billion in total backlog, $2.9 billion of which was funded.

The value of bids outstanding at the end of the second quarter was $12.1 billion. I've been the CEO of Leidos for just over a month now during which time; I'd begun an in-depth review of each of our operations.

I want you to know that each review is progressing thoughtfully and with deep rigor. While this review is ongoing, there are few things that I would note.

First, the strategy that was laid out by the Board is sound and my job is to fine tune it, so that we improve our execution and therefore our return. Second, we need to ensure that we have the right cost structure so that we can compete in the marketplace.

Third, we need to make sure that our portfolio is optimized to perform. And finally, our capital deployment strategy continues to prioritize maintaining the dividend, maintaining the appropriate level of financial leverage, investing organically for the future and providing attractive shareholder return.

In summary, notwithstanding our disappointment over the goodwill and intangible impairment charge, the operating performance of our core business showed signs of improvement in the quarter and we believe represents a solid base from which to execute and succeed. I'm completely committed to Leidos productivity and growth and to the people that make it happen everyday.

With that, I will turn it over to Mark for more details on the quarter and our outlook for the remainder of fiscal 2015.

Great, thank you, Roger. I would like to start out by providing a little more color on the non-cash impairment charges relating to goodwill and intangible asset this quarter.

I will first talk about the Commercial Health impairments since that was roughly three quarters of the goodwill and intangible impairment charges. As we have indicated on our previous calls, while our Federal Health business continues to perform well, we have experienced more challenges in our commercial Electronic Health Records business or EHR.

This has included the effects of several legislative changes and delays for ICD-10 and Meaningful Use 2 requirements which has changed priorities for hospital IT spending. In addition, government cuts in Medicare and Medicaid funding to hospitals has adversely impacted funds available for IT projects like EHR.

We previously believed these factors would subside and our Commercial Health business would restore to a high growth market over the long-term. After recent developments, business results were significantly short of our expectations in the second quarter causing us to reexamine both our short-term and our long-term view.

Our updated projections now contemplate continued short-term contraction with a more modest growth and margin profile over the longer term. Let me cover some of these recent developments.

First, a number of large EHR project opportunities in our forecast did not materialize in Q2. Second, we experienced a significant decline in pipeline over the past couple of months.

Part of this is explained by yet more recent delays in ICD-10 and Meaningful Use 2 requirements. There is now greater uncertainty over whether these requirements will stimulate spending levels as previously expected.

Also continued overall stress in hospital IT budgets appears to be constraining our pipeline as well. Third, we were unable to secure extensions or adjacent projects for a number of EHR consulting engagements which ended during Q2.

We see some customers reprioritizing budgets away from ongoing EHR projects for other needs that they have. And fourth, we are seeing increased competitive pressures in the EHR staff augmentation and consulting space manifesting in greater price sensitivity and the need for improved marketing effectiveness.

A combination of these factors caused a substantial reduction in our billable workforce in the quarter with little visibility for restoration in the short-term. Consequently, we felt it appropriate to reassess the fair market value of our health business.

This reassessment resulted in a non-cash customer relationship intangible asset impairment of $24 million and a non-cash goodwill impairment of $369 million all coming from acquisitions made in 2011 and 2012. We also took a non-cash goodwill impairment charge in our Engineering business this quarter.

This stem from underperforming business performance in Q2 in our Commercial Engineering business and as a result reduced short-term and long-term expectations most significantly from our design-build business within engineering. The impairment also reflects a recent reduction in our scope of services to a key utility client.

With respect to design build over the past year, we have seen revenue reductions stemming from the completion of several large design-build projects focused on renewable energy power production. Our strategy was to leverage our role on those renewable projects into engineering design, technology and consulting projects in adjacent energy markets.

We are now seeing this transition take longer and with less output compared to our previous estimate. Specifically, we have seen low success in new opportunity pipeline conversion so far this fiscal year even as our overall pipeline has continued to expand.

Second, we see higher price competition where larger competitors have a scale advantage, exacerbated by recent consolidation in the industry. Third, we've encountered customer delays and cancellations due to capital expenditure tightening, mergers and priority shifts.

With those developments, we reassess the fair value of our Engineering business. This reassessment resulted in a non-cash goodwill impairment charge of $117 million.

In context, the total value of the goodwill and intangible impairment charges represent about half of the value of the intangible value held in the ATS sector. The two business areas driving us impairment, Commercial Health and our Commercial Engineering business comprise about 15% of our total revenues.

Our longer term outlook anticipates lower Commercial Health and Engineering growth, continued investments to improve our competitiveness and consequently a more muted profitability compared to our previous view. Now, I'd like to turn the attention to our second quarter fiscal 2015 results, highlights of which were strong margins in our National Security Sector or NSS and also cash flow generation.

If you refer to slide eight of the earnings call presentation that is available on our Web site, as always, you'll see the consolidated revenues were $1.3 billion or down about 10% year-over-year. Excluding the intangible and goodwill write-downs, Leidos operating income margin was 7.7% for Q2.

This was favorably affected by the 8.4% operating margin in NSS offset by the $9 million operating loss, on Plainfield within the Health and Engineering sector, which eroded overall consolidated operating margin by 60 basis points. Interest expense was $20 million in the quarter, tracking to our expected normalized level for the year and our weighted average shares outstanding was $74 million.

But the tax rate, the vast majority of the impairments were non-deductible, thus there was little tax benefit associated with the write-down. The effective tax rate removing the effect of the impairments was 42% in the quarter.

This reflects an unfavorable discrete item in Q2, reflecting a reduction in tax benefits on the manufacturers deduction coming from losses on Plainfield. On a full-year basis, our effective tax rate excluding the effect of the goodwill impairments is now expected to be roughly 37%, an increase of approximately 1% compared to the expectation we discussed in our last earnings call.

Diluted earnings per share from continuing operations was a loss driven by the impairment charges $5.93 for Q2 and our non-GAAP EPS excluding the impairment charges was $0.61 per share on the higher tax rate. Cash flow generation was a highlight in the second quarter.

Operating cash flows came in at $124 million; in addition investing cash flows were a net positive of $68 million driven by the receipt of the U.S. Treasury grant of $80 million for the Plainfield energy plants.

This cash flow generation lifted our cash balance to roughly $360 million at the end of the quarter. Now, moving on to guidance, as Roger said earlier, today we are reaffirming our fiscal 2015 revenue guidance of between $4.9 billion and $5.1 billion.

We're decreasing our non-GAAP diluted EPS guidance for fiscal 2015 to the range of $2.10 to $ 2.30 per share, down from the previous guidance of $2.35 to $2.55. This reduction of $ 0.25 or about 10% is primarily driven by higher projected operating losses for Plainfield than previously anticipated and lower operating income projected from our Commercial Health, Commercial Engineering businesses for the reasons discussed earlier.

We're also reducing our operating cash flow guidance attendant for the reduced expected cash earnings from Plainfield Commercial Health and Engineering plus a little slippage in working capital reduction. Our updated fiscal 2015 guidance is now at $300 million or more down from our previous guidance of $350 million or more.

In terms of timing from a sequential perspective, we expect revenues in the remaining quarters to be modestly below our results in Q2. This is primarily driven by ongoing reductions for our support of overseas contingency operations in our National Security Sector and decreased expected revenues in the commercial areas within Health and Engineering.

Now, I will turn the call back to Roger for his closing remarks.

Thank you, Mark. I want to express my gratitude to our employees for sharing this journey with me as we guide Leidos to be a more profitable and consistent value creator.

I had the pleasure of visiting half dozen sites and continue to be impressed with our people and their passion and commitment to our customers. We have a very talented employee base and incredible technical capabilities.

Although, given the realities of the government budget and the competitive commercial landscape, our near-term future entails some difficult decisions and lots of hard work. It is my job to make our people and our capabilities to exceed for our employees, our customers, our shareholders and the communities in which we operate.

Finally, I would like to express my appreciation to our Chairman, John Jumper for navigating Leidos through the recent split and serving as a strong example of leadership. I look forward to working with him to deliver on the promise of Leidos.

And now, I will turn it back to John Sweeney for Q&A.

Operator, we would now like to take questions.

Hi. Thank you.

My first question, it revolves around the pace of award activity in the federal government, if you can give us any insights as to what you are seeing and in particular where do you think the government will actually spend their full government 2014 budget? Thanks.

Yes, Ed. Hi, thanks.

It's great to talk to you again. Of course, we are all looking at what's going on in the federal government space with congress either back or on their way back, we expect a short session.

My prediction will be, we will get a continuing resolution which will probably get us through December and then after election they will come back, they may kick that down the road on another CR into the spring. We are seeing customers spend their current obligations.

We have been able to bridge through some of the recent issues by having the customers spend prior on obligated balances but a lot of that is out of the pipeline now and they are spending at about the budget level. We have seen in the past couple of years a little bit of an upswing at the end of the fiscal year.

We are seeing probably a little less of that this year. And then in the overall market although there are still awards, we continue to see not so much cancellations but delays; delays because of protest and delays of just getting awards through the PBBs system.

Great. My other question is last quarter the comfort level with cash was lowered from $250 million to $200 million sort of the number we would expect that you would distribute cash at that level.

Has that changed, or are you sort of in a holding pattern as you evaluate here as – given your recent arrival, any thoughts on sort of what a base cash level would be?

Yes. Ed thanks.

And obviously this quarter we are significantly above that in the $360 million balance or so. I haven't actually spent a lot of time to decide whether $200 million or $250 million is the right number.

The good news about this company especially as our markets have moderated a bit, we tend to generate significant cash and so cash flow generation is sort of not on the top of the list. I suspect – but I know we have confirmed the $200 million, but I suspect for the near term we will carry significantly more than $200 million just because of the way cash has been coming in.

Our capital structure which I mentioned a little bit in my prepared remarks continues to be about the same as it was before, our philosophy around capital structure.

Great. Thank you and welcome aboard.

Thanks.

Yes. Thank you very much.

So could you give us some color in terms of – and what you have in terms of recompetes coming up and what you have been seeing in terms of pricing recompetes that you’ve won and perhaps takeaways from other companies? Thank you.

Well, great question, Cai. I would tell you the one that is in the forefront of my thinking and where I spend my time.

As you know, we are the prime on the military health system program on the federal health side. The government has taken a lot of programs in DoD and consolidated them into a program called the Defense Health Modernization System and the RFP for that program is now out on the street.

And that's the implementation across DoD of an EHR, EMR system. And we are teamed with Accenture and Cerner in our offering, by the way that RFP came out either on time or slightly early.

It's run by its own PEO now and we expect at least a procurement part of the process to proceed on schedule with proposals due in October and probably preliminary awards in the spring and then we will see how things go after that. You asked a second question which is how we see pricing in some of the recompetes and you are asking this across both the Leidos business and in my former position, the government is recompeting to try to drive more value out of their budget dollar.

And companies can respond in one of two ways. They can get their cost down and hold their margin or they can sacrifice margin.

Our plan is to get our cost down and part of the discussion I had in my prepared remarks were we are in the midst of top to bottom cost scrub to try to understand where we need to position the cost structure of this company to be competitive to win the recompetes.

Thank you. And as a result of ISIS, have you seen any signs of potential change in demand in the NSS space?

Let's see. I'm trying to think how I can answer that in a white world type answer.

I would tell you not anything that moves the needle at this point. Have we had conversations about certain systems that we have that would provide value in the war on terror?

Yes, I think we have seen increased conversations about some of our capabilities. But to tell you that you can see it in the bottom – the top line or the bottom line numbers at this point, I can't say that.

Okay. And the last question is your coming in and you seem to be fairly cautious on capital deployment.

John Jumper came in and really was pretty aggressive in terms of dividends for shareholders. What is your thought, is this just a temporary period that you are taking to kind of assess things and that you would kind of go back to the big focus on special cash dividends and deployment to shareholders and share buybacks or what's your longer term thought on capital deployment?

Thank you.

Yes. Well, Cai, you know, we as management along with the Board, we look at our capital structure every quarter.

And we just sit with the Board last week and for this quarter, we are comfortable with our cash deployment strategy, which is to reaffirm the dividend, right, to look at leverage on the balance sheet and make sure we have the appropriate mix of debt and equity. The one thing which I'm not sure that I heard John articulate quite as well and you'll hear from me is I want to make sure that we're appropriately investing organically in the business because that's what we're all here to do, which is to run a healthy business and to grow and that also means when it's appropriate to actually look at the M&A pipeline and I'm not telling you we are moving aggressively in that direction, but I will affirm we keep an active pipeline, so we're always looking in the marketplace.

And then with true excess cash, our commitment continues to be strong to return that to shareholders.

Thank you very much.

Thanks Cai.

Hi, good morning, guys. It's actually Chris on for Joe.

Roger, wanting to follow up on your comment on M&A. Mark, you'd mentioned that scale specifically was a competitive issue in Engineering business.

So are those commercial businesses areas where we could see continued inorganic investment?

Chris, great question. So we have had some discussion about small to mid-size bolt-on acquisitions in the engineering marketplace, but it's against a landscape of where do we want to compete.

In my list of priorities, significant M&A and engineering is not near the top. My management team and engineering would like to see it higher.

I'm not there yet. I'm trying to better understand where are competitive advantages in engineering and how we segment the market to find leadership positions.

And we have some significant leadership positions in engineering. I'm just not comfortable with that business yet to make a commitment to M&A.

Okay. And then you'd mentioned that one of the key strategy was optimizing the portfolio, could that potentially mean divestitures?

Yes, it does. And although we didn't announce it, our partners did.

We actually sold two small businesses in the period, a waste management business and another disaster recovery business for about cash proceeds of about $20 million. And at that level, we will continue to be buyers and sellers of businesses as we simplify our portfolio and segment our markets and look for those leadership positions.

But nothing larger, you don't expect?

I have nothing larger in the pipeline that I'm actively considering. As they say never say never but that is not the emphasis that I and the leadership team have at this time.

Great. And then one for, Mark.

Could you say what the loss in the second half embedded in guidance from Commercial Health and Engineering is for Plainfield?

We have a reduction from our first half pace, but I did not say that there was a loss in the second half for those two businesses, but their performances depressed from the first half. It's clearly an area where we are going to strive to do better.

Plainfield, as we, I think, alluded to earlier, was down for a while in Q2. We've taken advantage of that improve its performance, so we're expecting actually in that case an improvement in performance in the second half versus the first.

So the takeaway is from those three areas less profit collectively than the first half, but not necessarily in a loss position.

Okay. Thank you, guys.

Thanks, good morning. Welcome, Roger.

Just wanted to see if you have a view at this point on some of the longer-term financial targets that have been presented at the analyst meeting last year. So specifically thinking about the low-single-digit kind of revenue growth target for fiscal 2016 into 2017 and 8% plus operating margins.

I understand you're taking kind of a reduced longer-term view on the Commercial Health and Engineering business. So does that affect how investors should be thinking about the post fiscal 2015 growth potential organically of the company?

Jason, I appreciate the comment. As you know, we only have guidance out there past 2015, so I want to be careful not to extend the current guidance.

But as a point of strategy and philosophy, I don't see any reason why this company can't grow in the middle single-digits and having now gone through every operating unit and almost every contract and look at the new bids, 8% op income is certainly achievable by this company.

Okay. It's very helpful.

And just to pick up on one of the earlier comments, I think you'd said in the NSS business x [OCOs] (ph) you were down 2% this quarter. How did that compare to what that same metrics would have been last quarter and you think that figure can turn positive, exiting this year just based on how the year-over-year comps perhaps, play out?

Okay. So I'm looking at Mark on quarter-to-quarter.

Let me talk for a minute then I'll ask Mark to confirm the numbers.

Okay.

First of all, after the OCO adjustment down 2%, that's for me, I view that almost as flat, right, that's within our estimating year. And although you saw our summits number, we're actually going to have a significant increase in summits in the current quarter, in the third quarter although many of those won't come home until fourth quarter or even next year.

But there is quite a bit in the pipeline and if we win at our historic rate, we will see a pickup in third quarter and whether that actually gets us to quarter-over-quarter growth, I'll let Mark comment on that.

Yes, Jason. I would say that the OCO reductions, we do expect to continue although eventually slow in pace as we described at our Investor Day last year, that really is running on the same track that we had then described with some contracts like JLI having their anniversary in terms of reductions in Q3, Q4 of this year.

So the headwind does dissipate to some degree, but that said, we still see contraction in the defense outlays in the addressable markets we serve. So we would expect absent or x OCO is still some contraction in the short-term, which Lou and team are certainly focused on finding adjacent markets, plus the previously restricted markets C2, airborne, maritime, command and control work to offset that and provide a growth opportunity in the longer term and that's where our focus is.

Okay. And just last one for me.

Curious, Roger, if you have a view on kind of the revenue synergy, part of the story here, obviously that was part of the rationale for the split and there were some numbers provided at the time in terms of targets, which I think have been softened to some extent since then. But just qualitatively, how are you feeling about the revenue synergy opportunities, obviously understanding, you're trying to execute against those in a very difficult end market?

Yes, Jason, thanks, good question. So I went looking for that early.

The environment I come from really has one company feel. And hat's I think – a fertile ground here for me to drive the feeling of one Leidos.

And although we've got some really great examples of working across the company like Smart Grid as a service and some of our cyber offerings. We also see the potential to do a lot more.

And when I meet with Mike Pasqua and Lou and we talk about how we can help across the businesses, we're just finding almost unlimited opportunities to do some really neat things and create some new products and bring those to market. So the good news is, understand the promise at the split, some good work has been done, but what I'm excited about is, I think there is a lot more that we can do and we're already talking about how we can organize better to capture those cross linkages between our businesses.

Okay. Very good.

Thanks for the comments.

Thanks, Jason.

Hi, thank you. Good morning, everyone.

Good morning, Roger. Welcome aboard.

Thanks.

Just can you refresh us how much OCO is still in the business in terms of percent of revenue in the quarterly reported plus in the fiscal 2015 guidance overall?

We're going to think out loud a little bit as Mark and I are jotting some numbers down.

Roger, OCO was $73 million, the $94 million decline in NSS in the quarter.

Okay.

And then just roughly as a – in total OCO revenues in fiscal 2015, can you give a percent there or dollar amount?

Have we got shot?

Yes. What we said historically and I don't think we've had a change in our perspective is that we've had about $750 million in OCO revenues.

We told you that last year, we told you that's going to wind down to about $400 million, $450 million this year. And then longer term, we're going to convert some of those contracts of record.

So I think what we said and I'm not sure if we're reaffirming, but roughly about $200 million or so maybe a little more in terms of converting to programs of record in the long run.

Yes, and John, let me elaborate on that a little bit. What we've seen the customers do is to push OCO dollars into the base budget.

And we have had a fair amount of luck in following those programs into the base budget. What we're all waiting is for the President to come out with his strategy on the fight on terror.

And if you were online this morning, you probably heard that he is asking for a $5 billion counterterrorism fund. And we're yet understand whether that will be called OCO or base budget or it will have a new name.

But a lot of the products and services that we provide are well aligned with fighting the world on terror. And we look at this as an opportunity to grow our business.

Okay. So just to be clear, you had $750 million in OCO in fiscal 2014, you're still expecting $400 million to $450 million in OCO revenues in fiscal 2015, is that right, John?

Is that what you were saying?

Correct.

That's correct.

And then book-to-bill 0.6 in NSS, do you think – I know some of the federal – other federal peers had a higher figure in the quarter, it's not the same quarter, you 30 days different, but do you still feel confident that based on the $12 billion in bids submitted that you could see a pretty substantial increase in the book-to-bill in your October quarter?

Yes. As you know, our third quarter is always our strongest quarter in the federal space.

We can look into the pipeline and if we win at our historic rate, we should have a very strong third quarter.

And final one on guidance. Why is revenue unchanged?

So you explained the lowering of margins, excluding the write-down because of the Plainfield delays and the slower, a lot more investment in health, in particular, in engineering, but revenues which did better as a percent in the quarter, but the revenues are unchanged. Why – is the health and engineering – I guess, what I'm trying to ask is, if we just look at NSS and maybe the federal portion of the health.

What would you be doing with guidance? Is the lowering of the margins since you're keeping revenues unchanged strictly due to the commercial side and if we just looked at the federal business, which makes up obviously the bulk of your revenues that wouldn't have been unchanged given the performance in the quarter?

Yes, let me start out the answer, and then I'll let Mark give you the details. But I think you've got to get that right, which is obviously our Commercial Health and Engineering in Q3 and Q4 is below what we had expected and given that we have confirmed our revenue number, it's pretty easy to see that we feel better about our federal business.

And in fact, that's – if you look at our internal plan that's what you would see. And that really speaks to the value that we bring to that customer.

Let me turn it over to Mark, if he wants to add some detail.

I’ll confirm both of you that that is indeed correct. Federal is modestly outperforming our original expectations and that is offsetting what we're seeing on the commercial side.

But the commercial side is all fixed price and very sensitive to economies of scale from a profit perspective, plus Plainfield which has very little revenue and bottom line impacts, when we shut down are the reasons why revenue is the same attributed to federal strength and margins lower attributed to our reductions in commercial volume.

And just one more on NSS margin, 8.4 in the quarter very strong, you talked about that you seem to imply some non-recurring contract write-ups in the quarter. What would be a sustained rate and assess and what was kind of one-time write-ups if you will benefits in the quarter?

We still believe our sustainable margin for that business is 8% plus it does have some volatility with contract adjustments. However, historically we have had net write-ups in that business.

If you look at multiple years and certainly so far this year there are award for true-ups there. And strong performance on fixed price programs which Lou and his team has done really good work out over the past 6 to 12 months.

So we generally expect to see that condition in the positive territory over a long period of time. And that's our fundamental premise but notwithstanding 8% is our target in that area with the volatility we have in contract adjustments from time-to-time.

Okay. Okay.

Thank you.

Welcome, thanks.

Thank you very much everybody. And it was a pleasure having you today on our earnings conference call and we look forward to updating you as we move through the rest of fiscal 2015.

Thank you.