Kelly P. Hernandez - Leidos Holdings, Inc.

Roger A. Krone - Leidos Holdings, Inc.

James C. Reagan - Leidos Holdings, Inc.

Jon Raviv - Citigroup Global Markets, Inc. Robert M.

Spingarn - Credit Suisse Securities (USA) LLC Cai von Rumohr - Cowen & Co. LLC Krishna Sinha - Vertical Research Partners LLC Edward S.

Caso - Wells Fargo Securities LLC Gavin Parsons - Goldman Sachs & Co. LLC Sheila Kahyaoglu - Jefferies LLC Jonathan G.

Ladewig - Stifel, Nicolaus & Co., Inc. Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Brian Ruttenbur - Drexel Hamilton LLC

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter 2018 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 29, 2018.

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'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 2018 earnings conference call. We're pleased with our financial and operating results in the second quarter.

Overall, we delivered strong numbers across the board including bookings, revenue, earnings per share, margins and cash flow from operations. And I'd like to go over a few highlights in these areas.

First, revenue grew 3.5% sequentially. This marks the largest sequential revenue growth we have seen since our acquisition of the IS&GS Business from Lockheed Martin in 2016.

While still down year-over-year as we expected, revenue is trending nicely from the contributions of new program ramps which we expect will further accelerate throughout the year. A couple of the more significant programs contributing to our sequential revenue growth include our team's work for the National Geospatial-Intelligence Agency under the Information Technology Enterprise Management User Facing Services or NGA ITEMS UFS program; and our efforts in support of the U.S.

Army Corps of Engineers-Information Technology or ACE-IT program, and also several of our classified programs. Next and looking at our increased margins during the quarter, adjusted EBITDA increased sequentially to 10.9%, roughly 70 basis points higher than last quarter.

This increase reflects careful management of our business growth to ensure that we win and execute on programs that allow us to grow our revenue, while sustaining strong adjusted EBITDA margins at or above our 10% long-term target. Clearly, there's always a trade-off between growth and margin, but we remain committed to thoughtfully balance these to deliver on our long-term revenue growth and margin targets.

For bookings in the quarter, we saw continued improvements in our win rates. We booked $3.4 billion of net awards into backlog in the quarter for a book-to-bill ratio of 1.4.

Exiting the quarter, our backlog was up to $18.3 billion. Some of the more significant awards included a $365 million program with the Department of Energy to provide research and engineering services to the National Energy Technology Laboratory and a $472 million contract with the Department of Veterans Affairs to continue support of the VA's information infrastructure modernization efforts through data center consolidation and cloud computing services.

Additionally, we continue to focus on expanding our relationships across the intelligence community. In particular, we have seen strong growth in our NGA account.

Finally, we recently signed a subcontracting relationship with Cerner to assist in their implementation of the EHR modernization program for the VA. Our scope of work on the program will include roles in the program management office, deployment implementation, helpdesk sustainment, and security.

Due to the structure of the contract, we don't expect a significant one-time booking, rather a varied level of bookings reflecting our level of activity over the course of the program. We're proud of our role in the program and the continued strength of our relationship with Cerner in enabling improved healthcare for our active duty and veteran service members and their families.

We had another quarter of robust cash generation with $271 million in operating cash flow, keeping us well on track to meet our guidance. Cash flow from operations in the quarter reflects a notable reduction in DSOs in the period, something that Jim will discuss in his remarks in a moment.

During the quarter, we entered into an agreement with Capgemini to sell our commercial cybersecurity business. Our decision to transition the Leidos commercial cybersecurity business to Capgemini is the result of our deliberate strategic focus on providing services and solutions, including cyber, to our core markets, governments, and highly regulated industries.

Capgemini's engagement in a broad set of commercial markets make them an ideal fit for the Leidos' cyber business. We expect the deal to close by the end of the year subject to regulatory approvals.

While the terms of the deal are not disclosed, the proceeds from the sale, which we expect upon close, will be additive to our cash flow expectations for the year and subject to the same capital deployment philosophy we've consistently indicated in the past. We'll continue to balance investments for growth, regular quarterly dividends, debt pay-down, and share repurchase to enable an optimal cost of capital, while also driving increased value for our shareholders.

As we've indicated more recently, since achieving our targeted leverage ratio, we don't plan to repay debt beyond required amounts. During Q2, we continued to execute on our share repurchase program buying back an additional $90 million in stock which brings the year-to-date total to $100 million.

Looking more broadly now, the macro environment remains favorable with outlays up over prior years as agencies work to spend against the budget increases approved and finalized in the omnibus that was signed on March 23. The final quarter of the government fiscal year, which is our third quarter, will be important to determine how much of the budget authority will convert to outlays.

The remaining unspent budget authority would then further increase unobligated balances projected for fiscal year 2019 and beyond. As we look towards next year, fiscal year 2019 spending bills are well ahead of previous years in the legislative process, with the passing Tuesday of the Senate's authorization bill at $716 billion.

Although congressional leadership is committed to conference on the authorization bill this month, it is likely that the fiscal year 2019 appropriations bill will lag and we will again start the fiscal year with a continuing resolution, the length of which will likely be determined by the outcome of the mid-term elections. Even under a CR, however, fiscal year 2019 would start at fiscal year 2018 current service levels which are significantly higher than they were in fiscal year 2017.

While uncertainty remains, the backdrop is still positive with higher outlays in fiscal year 2018 and 2019 and we're committed to leverage our strong competitive position and technical differentiation to drive value for our customers and grow our business. Next, I'd like to highlight a few notable changes we've made with respect to our board of directors during the quarter.

First, in May, in accordance with our governance guidelines on the rotation of board leadership roles, our board appointed Bob Shapard as Lead Independent Director, replacing Larry Nussdorf in that role. Bob has served on the board since 2013 and brings more than 30 years of experience in executive management and finance to the board.

Bob was most recently CEO of Oncor Electric in Dallas. We look forward to Bob's continued leadership and contributions in his new role.

Larry, who has been a Director since 2010, continues to serve the board and was appointed Chair of the Audit and Finance Committee. We also announced in June the appointment of Bob Kovarik to our board of directors.

Bob brings more than 40 years of experience in risk management and auditing for major corporations, including serving as a Partner at Ernst & Young. Additionally, Bob sits on the CareFirst Board of Trustees and serves as Chair of its Investment and Finance Committees.

We are pleased to have Bob join our Audit and Finance Committee, further increasing the strength of our board. During the quarter, we made further investments in our employees through our training and development programs and through additional benefits in order to improve our overall competitiveness in attracting and retaining talent.

We've seen a notable improvement in retention rates year-to-date versus the prior year, and we've had good success in hiring new talent to the organization. We'll continue to assess and improve areas that will strengthen the ability of our talented workforce to provide best-in-class innovation and solutions to our customers.

While we still have two quarters to go in the year and a back-half loaded growth profile, we're pleased with our achievements and progress to-date, and remain committed to driving profitable growth. With that, let me hand the call over to Leidos' Chief Financial Officer, Jim Reagan, for more details on the quarter and our guidance.

Thank you, Roger, and thanks, everyone, for joining us on the call today. Overall, we're pleased with our second quarter financial results which demonstrate solid growth across the company.

Highlights for the quarter include robust sequential revenue growth, strong bookings, profitability and cash generation. Additionally, we generated non-GAAP EPS of $1.12, which is the highest quarterly earnings we've seen in five years.

Our continued focus on profitable growth resulted in another solid quarter of bookings in Q2, generating $3.4 billion in net bookings and a book-to-bill ratio of 1.4. This strong performance was across all of our segments, each of which generated book-to-bill ratios above 1.0 during the quarter.

Specifically by segment, our Defense Solutions segment generated about $1.5 billion in net bookings, resulting in the second quarter book-to-bill of 1.2. This extends the trend that we've seen in the last couple of quarters, reflecting the efforts the team has put into our business development process for more than a year now.

Trailing 12-month book-to-bill in the segment is 1.2. Bookings in our Civil segment were also strong at $1.1 billion in net bookings, a substantial increase from the prior quarter's $635 million, driven by wins with the Department of Energy, Army Corps of Engineers, and TSA, to name a few.

Trailing 12-month book-to-bill in our Civil segment was also strong at 1.2, again, highlighting the investments that we've made in business development. Our Health segment generated the strongest book-to-bill during the quarter at 1.8, resulting from $800 million in net bookings that reflect wins with the Defense Health Agency, the VA, the CDC, and several others.

Now, moving on to the P&L. Consolidated revenues for the quarter grew 3.5% sequentially, reflecting revenue growth from new program wins such as NGA items and the ACE-IT, as well as the expansion of scope and on-contract growth with many of our existing programs.

We expect these ramps to accelerate through the rest of the year. Our non-GAAP EBITDA margin increased 70 basis points sequentially from 10.2% last quarter to 10.9% in the current quarter, demonstrating the success we've had in managing programs for profitable growth.

The increased program margins and revenue growth resulted in sequential increases in both our GAAP and non-GAAP operating income of 25% and 10%, respectively. Our non-GAAP operating income of $260 million excludes the impact of $61 million in adjustments, including $51 million in acquired intangible amortization and $8 million in restructuring and integration costs.

Net interest expense of $35 million was largely in line with our expectations. Non-GAAP diluted EPS from continuing operations was the highlight in the quarter coming in at $1.12.

These earnings were calculated on the basis of a weighted average share count of 154 million fully diluted shares outstanding, flat with the prior quarter. We exited the quarter with a fully diluted share count of 153 million shares, down 1 million from the prior quarter, reflecting the share repurchase activity that Roger indicated earlier.

Cash flows from operations during the quarter of $271 million grew from the prior quarter and reflect the seven-day reduction in DSO from 71 in Q1 to 64 in Q2. This improvement reflects actions we've taken since the financial systems consolidation to streamline our billing and invoicing processes.

We will continue to optimize these areas, but consider the current DSO level to be close to a normalized level for the company. Beyond the share repurchase activity and contained within our financing outflows, we made $27 million in payments on outstanding debt, which includes a $10 million payment triggered by the cash flow sweep provision in our credit agreement.

Now, let me share a few highlights from our segments. Revenue grew substantially in our Defense Solutions segment during the quarter, up 7% from the prior quarter.

The sequential growth was driven by the ramp-up of new program wins, which we expect to continue throughout the year. Revenue in the business also reflects the slight year-over-year increase, reflecting new program revenues that offset the contraction of other programs which experienced losses in the prior-year period.

Defense Solutions' non-GAAP operating margins were largely flat, both sequentially and year-over-year as the positive effective program completions generally offset the impact of program ramp-ups in the period. Civil segment revenues declined 2% sequentially, reflecting continued wind-down of prior-year program losses.

On a year-over-year basis, Civil revenues were down about 6% as the prior-year period was particularly strong, driven by timing of materials purchases on programs and certain one-time write-ups. The strong bookings in the Civil segment provide a good leading indicator of its forward growth prospects.

Non-GAAP operating margins in our Civil segment declined 140 basis points sequentially to 10.3%, primarily driven by contract mix changes. Health segment revenues increased 6% sequentially, driven largely by increased volume on existing programs.

Additionally, non-GAAP operating margins in the Health segment increased over 500 basis points sequentially to 17.7% as our customer-facing teams have done a great job driving on-contract growth with some of our T&M programs. On-contract growth typically has shorter sales cycles and this is an area where we have less forward visibility than growth driven by new wins or takeaways.

However, as we've indicated, on-contract growth is an important factor in our growth plans for the year and we're certainly pleased with our team's actions to help achieve this. Now, onto our guidance.

Our results to-date and particularly our recent wins position us well to deliver on the guidance we've previously laid out and reflect our expectations for continued sequential revenue growth. And to reiterate, we expect revenues in the range of $10.25 billion to $10:65 billion, adjusted EBITDA margins between 10.1% and 10.4%, non-GAAP diluted EPS between $4.15 and $4.50, operating cash flow at or above $665 million.

In conclusion, we are pleased with our results in the quarter and the sequential increase in revenue, margins, and bookings which position us well to deliver our long-term growth, margin, and cash flow targets. Before I open it up to questions, I'd also like to mention that we've set the date for our upcoming Analyst Day for September 17 in New York.

Roger, Kelly, and I, and other members of the executive team will be on hands to present an update on the company and our strategy, and we look forward to seeing many of you there. With that, Rob, let's open it up to take questions.

Hey. Good morning, everyone.

Thanks for taking the questions.

Hey. Good morning, Jon.

Hey, Roger and Jim. Just in terms of the second half pick-up, can you just give sort of maybe from a bigger picture on take on the essentially headwinds that you've experienced flipping any tailwinds and just how those two pieces interact with one another?

Yeah. I know you're talking about the ramp and the growth we have in the second half.

On the headwinds, I'm not seeing a lot that I worry about relative to headwinds, with the book-to-bill in the quarter, most of this is in backlog. Some of it is, what we call, incumbent capture and that's where we've been successful in winning a business that another contractor had.

And normally you'd say, well, can you get the people to work on the contract and therefore generate the revenue? And when these programs are takeaways from another contractor, very often we get a majority of the workforce to leave that company to come to work for us.

And so, we're actually very comfortable with the ability to get the talented workforce on the contract and performing and therefore billing and doing revenue recognition. So, we don't see a lot of headwinds.

I mean, there's the usual government shutdown, what happens to the administration, but those are the risks that we face year-in and year-out. So, we are obviously very comfortable with where we are.

It was great to get this one in the book and we feel confident about going forward.

And then just following – thanks for that perspective. And then, just following up on that, would you quantify perhaps in terms of second half sales plan, how much is in backlog?

How much do you need to win? How much it needs to come out of customer?

Essentially, how much is in your control or not in your control? And if you can't quantify, perhaps how where we sit today compares to previous years as you look at the second half plan?

Hey, Jon. This is Jim.

For the back end of the year, there is roughly about 5% of our target that is kind of go-get, with the balance of it being in backlog or being easily realized on contract growth or expected pick up on re-compete. But that gives us a lot of comfort of hitting that number.

One other thing that's probably worth mentioning, also Kelly has reminded me here that when I reiterated our guidance, for some reason, I said $665 million, I meant to say $675 million for that cash flow number; again, at or above $675 million.

Understood. Thank you.

Okay. Thanks.

Thanks, Jon.

Good morning.

Hey, Good morning, Bob.

Good morning.

So, I thought maybe this is pretty good time to walk through GENESIS and then the VA win and compare the two and also an update on where GENESIS is, maybe you can address the rescission. And just what's the right way or the right context for us to think about those two programs and the progress?

Well, first of all, as you noticed that we put comments relative to the VA in my prepared remarks. There's always been a lot of interest around where that contract sits.

And I'm sure you noticed in the quarter that Cerner was able to sign their contracts and then we were able to negotiate our relationship with Cerner on the VA program. And there is still some program planning going on and we expect that to be more booked on a current basis rather than a single event.

On what we call the Defense Health Management Systems (sic) [System] Modernization program or DHMSM program, again, it's on track. We expect to begin wave deployment activity in Q3, which is moving from the IOC sites to the production environment.

And that will get us off and running, and then, there are various 200 sites or so that we will roll the program out to over the next year. And so, again, it's on track, fully funded, great support from the program.

We were up on the hill talking to legislators and strong support for that program going forward, and we should be fully deployed by 2022. So, all those numbers that we've given you in the past still holds and the customer, I expect, will announce sort of their schedule on their sites sometime in Q3.

Roger, does the timing hold? It sounds like you're saying it does, but again, there's been a lot of negative news on this program and I thought this would be a way for you to clarify.

Yeah. Thanks.

I don't characterize a lot of what people may have read as negative news. I think we do a lot of electronic healthcare records implementations.

Anytime you do this, you are changing the way people do business and we see this when we do a commercial installation and change is a tough one and change management is really, really important. And if you go in on any IT system, a general ledger or an HR system and you ask the users shortly after the implementation of a new system, what you don't like and what you would like to see change, you're going to get a long list.

That's why we did IOC sites. Madigan is a large hospital.

The whole reason the program was put together the way it was is for us to install it in IOC site, put people on the ground, understand what they liked and what they didn't like, gain that knowledge, take those lessons learned, put those into our deployment plans, and go forward. There are a lot of huge benefits that have occurred to the environment up at Madigan relative to clinical results.

And that's why the DHA elected to go with a unified electronic health care record system and they're reaping the benefits of that. I know DHA is really interested in standardizing clinical workflows and that's part of the program and we've been successful in doing that.

And see, I didn't mention because I think we – you probably have read this, but the Coast Guard has been added to the program. And we're in discussions with our customer about definitizing what the Coast Guard phase of the program looks like.

So, again, strong support on the program. The system is working well.

I think veterans and active militaries will benefit from having the same Cerner backbone and we're just pleased to be involved with both programs.

And on that, Roger, how do we think about the scope for the VA contract versus what you're doing for the DoD contract? Is it essentially the same thing?

It's just in the second case or on the VA piece you're the sub?

Well, probably not exactly the same. On the DHA program, the Defense Health Management program, we're the prime.

So, cloud hosting, the Cerner organization, Accenture, Henry Schein, all flows through us. So, we recognize significantly more revenue on that program.

On the VA program, Cerner is serving that role, and we're a support to them. So, we will only recognize the value-added that we provide.

And our role will be certainly different. We will not be the program manager.

We don't have contract performance responsibility as the prime integrator. That's just not what we do.

We're going to be in the program office. We're going to do helpdesk.

We're going to do sustainment. We're going to help them with integration.

We're going to help them with security and cybersecurity, a lot of the value-added that we provided under the DHA program. But again, we will not be the name on the contract.

We will not be prime. But we're going to be fully supportive of Cerner and we're committed to the success of the program and to make sure that the vets get the best electronic healthcare records system that industry can possibly provide.

And that's our mission and our goal and this is the way the VA has elected to go forward and we're completely supportive of the customer. But, it does, from your standpoint, say that we will recognize significantly less revenue on the VA program than we would on the Defense Health program because of the way the contract structure works.

And on profit, the same thing or no?

We haven't disclosed anything on profit relative to the VA program. I would say it's in the same order of magnitude.

We don't expect it to be significantly higher or lower. And no, I don't think it is going to be that different.

And last question on this, and I apologize for sticking to this, but there has been confusion about it. But why the shorter-term nature of this Veterans Affairs contract and the one year base...

I'm not – because we're a sub. I really can't speak to service contract with the VA.

I mean, that's best for the Cerner team to talk about. The size of the program, the implementation of the program are comparable over time.

But our relationship with Cerner is more of an umbrella for which we will buy – they will buy services from us, kind of, like a task order by task order or year-by-year basis. We're not getting into a lot of contract details.

There is a lot of similarities between the program and how we negotiate year-over-year task orders on the DHMSM program. They're both roughly 10-year programs.

The VA program is starting three years later than the DHA program, but they are roughly the same duration, the VA because of the number of implementations and the size of the VA is probably a larger program, because there's just more VA facilities out there than there are in the DHA environment.

Okay. Thank you for clarifying.

Yeah. You're welcome.

Thank you. Very quick follow up.

Roughly, what percent of the VA program revenues that Cerner has do you expect you will have? And what is the profile of your build?

Given what you're doing, I would guess you have relatively little in the first two years.

Cai, this is Jim. Thanks for asking.

Right now, we're continuing to size up how that's going to look and it's probably not appropriate this time to venture to guess on how big the overall VA program is going to be. Like Roger indicated, it is going to be larger overall in size.

And because we are going to be a subcontractor or are a subcontractor of Cerner, the way it shows up on our books will be a lot different. But certainly, a lot of the same elements of how we add value to that program will be similar between VA and DHMSM.

But at this point, it's going to be difficult to size what percentage of the total we're going to get.

And is it fair to say that basically you don't have much revenue in the first two years, because your functions look like they are related to implementation?

There might be – certainly for the next couple quarters, it's going to be de minimis. But going into next year, there might be some element of material revenue as we start to help Cerner with some of the start-up phases of the program.

But again, commenting on the size – the revenue size of individual programs is generally not our policy.

Got it. So, you had indicated before that 95% of half two revenues are in backlog.

That implies a certain revenue target. When you make that comment, Jim, are you talking about the midpoint of the guide, the low end, the high end, how shall we think about that?

Well, just to make sure I was clear, I was saying that 5% is what we have to go – is still kind of go-get. Meaning, it still has to be awarded to us...

Go get to hit what, what sort of a revenue number?

To hit the midpoint.

Midpoint.

Yes.

Okay. Thank you very much.

And then, – yeah.

So, there is upside on contract growth. There is upside in things that we've talked about that have some volatility in the health group.

So, it is really hard to say exactly and again, because we've got our revenue guidance still fairly wide. The velocity of the ramp is still something where we see some possibility for upside or other volatility.

Thank you. And in discussing revenues, you compare them, you bench them against Q1.

So, a quarter-to-quarter compare; whereas usually, people tend to look at things on a year-to-year basis. Normally, you have a seasonal downtick in the fourth quarter.

How should we square this sequential build in business with that normal seasonal pattern?

The seasonality that we have seen in the past typically results in the number of workdays and seasonality around vacations. Here, we're going to – we've seen such strong bookings in the last couple of quarters and looking at how that phases out.

We've built a contract waterfall from the bottom-up, Cai, and where we see hiring happening and where we see our ability to rebadge people off from incumbent contractors over to the work that we've taken away from others is where we really get our confidence and the full-year guide.

Terrific. Thank you very much.

And speaking to your point on year-over-year, that's why, we have spent some time focusing on sequential growth rates in our commentary for this quarter compared to in the past.

Terrific. Thank you so much.

Okay.

Hi. Thanks.

On the VA contract, can you just talk about how it overlaps with DHMSM in terms of the timeline of the installs? Because I know when it was first being released in the press or you talked about in the press, a big part of the VA installation case was that it would closely follow or mirror the DHMSM install timeline.

So, can you just give us a sense of how the overlap happens between those two programs in terms of installation sites and waves?

Well, you're asking for a level of detail probably beyond which I'm qualified to answer. Let me talk in general.

The way the programs are phased, we'll be implementing essentially a production program starting in the third quarter. And the VA program will follow that and will benefit from the work that has been done under the DHA program, all right.

And I think the plan is that they will go through the same process that we did under the DHA program. They'll go through a period of configuration of getting the Cerner product prepared for the VA.

They'll probably go through some kind of an IOC side or prototype and then they'll roll into production. Because the program started a couple of years behind the DHA program, it probably will be behind us by some period of time.

But all the specifics on the VA program, I would kind of direct you to Cerner, because they are the prime contractor, and it's really their role to talk about the waves and what the customer has in mind. And we're in a good position to inform you on what's going on with the DoD program and where we are with rollout of DHMSM.

And our position is really one that is to support Cerner on VA and that's really probably the best way for us to handle that.

Okay. And then, on your win rates, can you just talk about what your new award win rate is?

And then, also, what – can you talk about average sort of timing between when you bid for a contract and when it's awarded? So, the contract wins that you had this quarter, when did you begin bidding on that and how did that stack up in terms of the average time between the bid and the award?

Well, first of all, we don't ever put out actual win rates. So, we do try to give you a sense of where they're trending and we made the comment that our numbers are up.

And frankly, across the board in all kinds of categories, we talk about re-completes, takeaways, new awards and what have you. It's a complex business, as I'm sure you know.

And in any quarter, when we add something to backlog, we have what we call on-contract growth and that could be a cash quarter we pursued even within the quarter, and some of our business is actually very short cycle certainly in the commercial healthcare business, that can be 6 to 10 weeks from bid to award. And then, we have other programs that are literally years.

And with protests and delays in government, it could be nearly two to three years when we started pursuing to when something is actually awarded. So, it's a fairly mixed bag, but somewhere between probably 12 to 18 months is a good figure of merit to carry in your hand.

Yeah. And it's probably worth saying, in some cases, things flip pretty quickly and the VA contract is an example of one that was less than that.

But, if you get back to win rates, it's probably worth amplifying that one place that we've been really pleased with our performance on win rates is on takeaways, which are particularly difficult to realize and our increased success in building new business that is held by others has been pretty gratifying.

And one quick last one on your pipeline. I'm sorry if I missed it in the prepared remarks, but what is your amount of bids outstanding and what was the increase sequentially?

Yeah. The bids outstanding is about just under $25 billion.

I think it's like $24.6 billion and it's roughly consistent with what we saw last quarter, primarily because we had a lot of new things coming out of the pipeline that have been awarded. So, that's why, it's roughly flat.

Okay. Thank you.

Hi. Can you talk about the TSA contract that appears to have come back to you and how that sort of – where it stands as far as being a full contract as opposed to a bridge, and how it would fall into the bookings numbers?

And also, is that part of the uptick in the outlook for the second half?

Yeah, I'll give you as much color as we have. I think, Ed, you're talking to a program that we refer to as the TSA ILS or Integrated Logistics Support contract, for which we were a partial incumbent, and it was a very heated competition that we lost.

As you know, we filed a protest, we lost the protest. It would appear that the TSA has come back to us and asked us to extend our legacy contract.

They have a unilateral right to do that for a period of time, where they can literally just call us up and say, we want you to continue to perform with the contract that you have. We were under today that unilateral extension that leads to a discussion to a bilateral extension.

And what we expect, we will negotiate a bridge contract with the TSA on a bilateral basis. And that we think that sometime in the future, that will lead to a re-compete and that they will think about what their needs are to support inspection to equipment in airports, that they will write a new request for proposal.

They'll come out with a new solicitation and that sometime in the future and we're talking maybe, it could be a year for the TSA to put together a new procurement package and to get that out in the street, but that they will go through a re-procurement effort. And so, our results in the quarter, there might have been a month of unilateral extension that was in backlog, something like that, very de minimis.

If we can get a bridge contract negotiated, which you're saying, we hope to do that soon. Then, that could be like a year's worth of business that we might book in the third quarter.

Again, not a needle-mover for us, but a program that we care a lot about. We all travel through airports.

We're committed to support the TSA customer and to keep the equipment well maintained and allow us all to travel, but that's a short-term bridge. The period of months or maybe a year, year-plus, then we expect the TSA in 2019 probably to come out with a new procurement, and we will assess that.

RFP, when it comes out, like we do with all business, and we'll likely bid on it and we'll see where that goes.

My other question is around the divestiture to Capgemini. I believe it's about $100 million in revenue.

Is that the right number? Is the margins above or below the corporate average, EBITDA average?

And then, the tail end of the question is, is there more possibly to come on the M&A divestiture side?

Ed, thanks for your question. We really haven't been in the business of disclosing the size of the business that we're divesting or the margins that that business was carrying.

The main reason that we made the decision to divest it is that it simply is a business that had a better home in a place like Capgemini and we are continuing to provide cyber capabilities and cyber support for all of our customers, again, primarily governments and regulated industries where it's much more in the fast current where we play. In terms of future divestitures, we're always thinking about ways to reshape the portfolio through acquisitions.

And I would never say never on additional divestitures, but I wouldn't say that you should expect to see one next quarter, but we're never going to say never on that.

Hey. Good morning, everyone.

It's Gavin on for Noah.

Oh. Hey, Gavin.

Hey, Gavin.

Hey. A pretty strong quarter on free cash flow.

I think you're pretty much near 50% of the full-year target already. Obviously, that had a pretty good DSO number in it, but I was just wondering if we should expect the back half to have its typically strong seasonality if you thought there was a little bit of pull forward this quarter.

Yeah. Gavin, there obviously was some pull forward in the quarter because we had a DSO reduction that was faster than what is normal.

And with that said, we're very pleased with our ability to continue to ring cash out of the balance sheet. And this year, 43% of our full-year target was achieved in the first half of the year.

Typically, that's between 20% and 25%, just because of the normal seasonality on cash. So, I think that that is a good proof point of how well we're executing.

This isn't just a billing thing. This is execution on programs.

And happy customers pay faster, and that's also part of what's contributing to strong cash. It certainly makes us more comfortable that we'll achieve or overachieve on that $675 million-plus number that we've articulated.

Correct. I believe you said that $64 million is a normalized number, close to a normal level.

Is that more of a 2018 comment? Do you have stretch targets beyond that or kind of what would we need to see if you wanted to bring that number down?

Yeah. There's certainly a part of the $64 million that relate to some longer term receivables that we have on a few programs and those will continue to work their way down.

And we're always going to be looking for ways to take days out of the capital conversion process. And I think that we're never going to stop looking to continue down into the 50s million.

But I think that it's fair to say, as you suggested, that 64-ish million is a reasonable number that we would be focused on through the end of the year.

Great. And if I could, just one quick last one.

Great book-to-bill in the quarter. Just curious how that stacks up of long-cycle versus short-cycle bookings and how we should think of that phasing over maybe contributing to the rest of the year?

I know you said you had the 5% go-get versus thinking of those bookings as more contributing to 2019 or 2020 growth rate.

Yeah. I think that you should think of those as having a lot of contribution to 2019 and 2020.

We commented last quarter that we're seeing some lengthening of the average contract award or average task order award duration and we're continuing to see that trend into the second quarter. And I think that we probably have a reason to think that the average contact length will continue to increase into Q3 and Q4.

Got it. Thank you very much.

Thank you, Gavin.

Hi. Good morning, everyone.

Hey, good morning.

Hi, Sheila.

Can you guys just give me an idea of how large of the programs are that are ramping down and what sort of anniversaries as we get to the second half? And then, also, if you could comment on any profitability changes as some programs ramp down and ramp up going forward?

I can't tell you that we have the detailed roll-up of what those roll-offs are. A lot of those, however, did complete their ramp down in Q2.

And so, that's why again we're seeing this inflection to growth on a year-over-year basis that we're going to see in Q3 and Q4. We didn't see year-over-year growth in Q2, but, of course, when you take a look at the sequential growth rate and the book-to-bill and our look at the bottoms-up waterfall, it's where we come up with the expected growth rates in Q3 and Q4.

Hi. Yes.

This is Jon Ladewig for Joe. Good quarter, guys.

Just really wanted to ask about the corporate other income line. You had a step down this quarter and we were just curious what your thoughts are for this number on a long-term rate over the next few years.

The number that you're seeing there is getting closer to what you're seeing. As we continue to look at reduction and streamlining of our corporate expenses, including real estate and including corporate staff, we're going to begin to converge on what you're going to expect to see on an annualized basis.

Thanks. Over the next few months, as the government starts to spend the additional funds as a part of the budget, how do you think that's going to manifest itself most?

Is it going to be additional funds obligated to existing contracts, new starts, just kind of love to hear your perspective on that? Thanks.

We feel pretty good across the board. There's a lot of attention on what's going on in the DoD, but remember, we're more diversified than that.

So, the DoD, I think the headlines are they're going to buy more airplanes and trucks and ships, and that's all good. And that tends to grab the headlines.

What's also happening is, they're spending more money in R&D, which is important to us, and they're spending more money in readiness which is maintenance, repair and overhaul, which is important to us as well. So, we see the service side benefiting from the uptick in outlays.

So, the good news is, we've got the omnibus signed. The money is in the pipeline.

Agencies are trying to spend that to increase the effectiveness of what they do with their mission. And we've seen now finally some of that money start to come through.

We've seen procurements that have been in flow for a long time finally get awarded. And we've seen protest periods come to an end.

And so, it's not a bad summer. I think we're all looking at the fall, the midterm, the legislation and legislative process, and hoping that this goes smoothly, and that we get our bills and we get things passed.

But history here in Washington says it never goes quite as smoothly as we would all like.

Thank you very much. Just a question on – so far into the quarter, the third quarter, can you talk about bookings and trends?

Is it going to be seasonally strong more so than normal with the budget flush or do you see that third quarter maybe not as seasonally strong and fourth quarter be a little bit stronger? I've heard a variety of comments coming out of companies that maybe some things are overlapping into fourth quarter where you normally have this huge budget flush in third quarter.

Can you talk a little bit about what you're seeing in terms of bookings?

Well, Brian, I'll talk a little bit about it. Of course, this is a second quarter call and we're not announcing results for the third quarter.

First of all, everyone knows that our third quarter has always cyclically been a strong quarter for us and all the indications are that it will be that again. We had what I think is a very nice second quarter.

And I really can't judge second quarter now versus third quarter, but we've always had a strong third quarter. It is a period of time when the government wants to get their awards out on the street, they want to get funds obligated before the end of the fiscal year.

We expect to see that again. There were some programs that we were awarded in second quarter.

Honestly, I thought they might rollover into third. So, there is a little bit of movement from third quarter to second quarter.

But, we see nothing structural that says third quarter is going to be different than it has been in prior years. Budget flush, maybe not quite as aggressive as we've seen in the past.

I know within DoD, most of what they got was two-year money, so that they don't have to get it obligated before the end of the fiscal year. That's not completely true of some of the civil agencies.

So, we may see a little bit of a push from the civil agencies. But, we have all the indications that third quarter will continue to be a strong quarter for us and frankly for the other companies in this sector.

And without giving anything away, we've been pleased with the quarter so far.

Thank you, all, for your interest in our results and our report. We look forward to seeing you at our Analyst Day on the 18th of September in New York.

Thank you.