Kelly Freeman - Leidos Holdings, Inc. Roger A. Krone - Leidos Holdings, Inc. James C. Reagan - Leidos Holdings, Inc..

Jon Raviv - Citigroup Global Markets, Inc. Noah Poponak - Goldman Sachs & Co. LLC Cai von Rumohr - Cowen & Company, LLC Robert M. Spingarn - Credit Suisse Securities (USA) LLC Rick M. Eskelsen - Wells Fargo Securities LLC Tobey Sommer - SunTrust Robinson Humphrey, Inc. Krishna Sinha - Vertical Research Partners LLC Brian Ruttenbur - Drexel Hamilton LLC.

Greetings, and welcome to the Leidos Second Quarter Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Kelly Hernandez, Director of Investor Relations.

Please go ahead, Ms. Freeman..

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter 2017 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; and Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team. Today, we'll discuss our results for the quarter ending June 30th, 2017.

Roger will lead off the call with comments on the market environment and our company strategy. Jim will follow with a discussion of our financial performance, and our expectations for the future. After these remarks from Roger and Jim, we'll open the call for your questions.

Today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Finally, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is provided 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 a 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 good morning. Kelly Freeman is the newest addition into our Investor Relations team, and brings 17 years of experience in the finance departments with Lockheed Martin and Leidos. We're pleased to have her here as our Director of Investor Relations.

Thank you all for joining us this morning for our second quarter 2017 earnings conference call. We had a very strong second quarter, driven by solid operational execution across all of our businesses. I want to thank our team for their unwavering focus on delivering for our customers, and our shareholders.

The results from the quarter and the year-to-date demonstrate our ability to extract even more value from the transaction than we had anticipated, and allow us to increase our 2017 guidance as well as our expectations of gross cost synergies from the transaction.

As we approach the one-year mark since the closing of the IS&GS acquisition, I want to take a few minutes to reflect on all that we have achieved. We have fully incorporated 15,000 new employees into the company.

We structured the combined businesses into integrated segments along our end markets, and continue to add depth and strength to our leadership team. We've been able to outperform to the targets provided at our August 1st, 2016 Investor Day.

Specifically, we've increased our initial revenue guidance provided then by more than $200 million at the midpoint.

And as I alluded to and Jim will detail further, we are again increasing our non-GAAP diluted earnings per share expectations for 2017 to a revised range of $3.45 to $3.60, more than $0.30 higher at the midpoint from our prior range, and nearly $0.50 higher than the initial expectations provided at our Analyst Day.

In addition, after raising our initial gross synergy estimates, from $240 million in our January announcement to $350 million in our August Analyst Day, the focus and results we've seen to-date allow us to once again increase our view here to now more than $400 million of gross cost synergies.

Jim will provide more details on the integration activities and revised expectations, shortly. Overall, the past year has been one of transformational change, and a lot of hard work by our employees.

One notable effect of this transformation was our renewed inclusion in the FORTUNE 500 listing, after having been excluded from this list following the 2013 split.

This is a testament to the successful execution of the transaction, and most importantly, an external recognition of the efforts of our employees; their commitment to customer and to a successful integration has enabled us to outperform expectations on many metrics and position us well for continued success and growth. Now, onto the quarter.

Revenue for the quarter was $2.6 billion, a non-GAAP diluted earnings per share came in well-above our expectations at $1.04. These strong results were driven by robust program performance, and the immediate impacts of cost reductions across our fixed price and T&M programs.

Adjusted EBITDA margins for the quarter of 10.9% exceeded both our full-year and long-term targets due to these factors. Also as expected, cash generation improved in the quarter, resulting in $177 million of cash flow from operations. We exited the quarter with $262 million of cash on hand, and a consistent philosophy on capital deployment.

As we've said in the past, we consider a number of options for capital deployment to include investing for growth in the business, regular quarterly dividends, debt pay down, and share repurchases.

Our balanced approach provides us with the flexibility to take advantage of market conditions to lower our cost of capital, while also driving increased value for our shareholders and an improved competitive position for the company long-term. Following a seasonally soft first quarter on awards, we saw a nice uptick in Q2.

Net bookings of $2.7 billion in the quarter drove a book-to-bill of 1.0. We are pleased with the numbers here, although we continue to focus on driving improvements in our business development operations.

We continue to focus on building a healthy, qualified pipeline, and increasing the win rates of submitted proposals through three primarily competitive differentiators. First, competitive pricing, which we have enabled through cost synergies.

Second, innovative technical solutions, which we continue to strengthen through investment in both people and capabilities. And third, our deep customer relationships.

A few notable program wins in the quarter possible through success in these three factors include a re-compete contract with the Veterans Benefits Administration supported by our Health Group. This contract allows us to continue our decades-long commitment to serving the nation's veterans with critical clinical support.

This win was held up in a protest for nearly a year, and after recent resolution, contributed to our bookings in the quarter. Another win is a task order awarded by the U.S. Army to provide program management solutions to the Department of Defense Biometrics program.

This win marks an example of a true revenue synergy as we're able to leverage legacy IS&GS' prime position on the DoD Automated Biometrics Identification System vehicle and our extensive combined qualifications in tactical biometrics collection, processing and solution development.

Finally, in our Defense segment, we are awarded a third task order by the U.S. Army to lead the integration of Airborne Reconnaissance Low-Enhanced systems.

The ARL-E program, as we call it, as we have noted before is a program of record supported by our Advanced Solutions Group enabling a multi-intelligent airborne platform that provides a persistent capability to detect and track targets with a high degree of timeliness and accuracy.

From a macro perspective, we've seen a couple of notable improvements since last quarter. First, the May agreement on the fiscal 2017 budget provided clarity on spending levels through the end of September.

And secondly, we saw a further progress in the resolution of key presidential appointments, including the confirmations this week of several important leadership positions at the Department of Defense.

However, despite this progress, there's still high number of unfilled leadership appointments and the approaching government fiscal year-end continue to serve as headwinds, in our view, to a more normalized procurement and acquisition pace with our customers.

Organizationally, during the quarter, we continued to strengthen our company leadership through the addition of Frank Kendall, Former Under Secretary of Defense for Acquisition, Technology and Logistics to our board of directors.

Frank brings over 40 years of experience in national security affairs, acquisition, engineering, and the military, further improving our board's breadth and depth of experience.

In addition, recently, after seven years of service to the company, leading a word-class legal team, our Executive Vice President and General Counsel, Vince Maffeo, has decided to retire.

I want to thank Vince not only for his contributions and leadership in helping navigate the company through several pivotal milestones including the separation from SAIC, and the recent acquisition of IS&GS, but also for his guidance, advice and support over the past few years that I have been with the company.

Replacing Vince will be Jerry Howe, who comes to us most recently from Fried Frank, where he served as partner. Jerry brings more than 30 years of leadership experience at global organizations in aerospace, defense, and intelligence.

Jerry's demonstrated background representing clients in government contracts litigation, investigations, and bid protests, as well as M&A, will serve us well, and I am excited to welcome him to the team. In closing, I'm pleased with our strong financial performance in the second quarter and in the first half of the year.

While there continue to be challenges ahead in this uncertain and competitive environment, I remain encouraged by the strength and determination of our employees.

Their demonstrated abilities to focus not only on delivering innovative solutions to our customers, but also on successfully implementing integration activities critical to enabling an optimum cost structure gives me confidence in our ability to succeed, grow and create value for our shareholders.

With that, let me hand the call over to Jim Reagan, Leidos' Chief Financial Officer, for more details on the quarter, and our full-year outlook..

revenue of $10.1 billion to $10.4 billion, tightening up our prior range of $10.0 billion to $10.4 billion. We now expect adjusted EBITDA margins of 9.8% to 10.2%, up from our prior range of 9.5% to 10%. We expect non-GAAP diluted EPS in the range of $3.45 to $3.60, up from the prior range of $3.05 to $3.35.

Our guidance for cash flow from operations is unchanged at or above $475 million, reflecting the potential cash impact of planned system migrations which are scheduled to commence at the end of Q4. In addition, we now expect our full-year non-GAAP effective tax rate to be in the range of 35% to 35.5% versus prior estimates of 37%.

In conclusion, we are pleased with the momentum in our business, and we're encouraged by the opportunities ahead of us. We remain focused on achieving our targets and driving synergies across the combined business to create value for our shareholders. And with that, Rob, let's now open it up so that we can take some questions..

Thank you. Thank you. Our first question is coming from the line of Jon Raviv with Citigroup. Please proceed with your question..

Hey. Good morning, guys. Thanks for taking the question..

Sure. Good morning, Jon..

Can you talk a little bit about to what extent the higher synergy target goes to the bottom line? And then, I know you're not going to talk about 2018 at this point, but if you're exceeding your 10% EBITDA – if you're potentially exceeding your 10% EBITDA target this year, is there chance to do better in 2018, or should we be mindful of some of the programs that are running hot this year that won't necessarily repeat next?.

Sure, Jon, and thanks for your question. So what we've previously said is that, approximately one-half of cost savings drops to the bottom line given that about half of our business relates to cost-type contracts.

What we've also said is that, you can expect the piece that is not savings that is attributable back to the customer to go to enhanced margins, but also gives us the capability to reinvest in the business, whether it's in additional market development and business development activities or research and development type activities.

So I think that, now we're seeing the possibility of EBITDA margins that are above the 10% that we've previously said. Our target was, and you are right, we're not yet ready to talk about what margins will look like in 2018.

But certainly, the success of our integration and synergies gives us the capability to be more confident in margin increases, but also give us the possibility of going in and investing more in the things that drive future growth in our business..

And then, in the quarter and year-to-date, we've seen a little bit of diverging performance between legacy Leidos and legacy IS&GS, especially on the sales side. How do you think about those two? I know, you're not going to guide specifically to those.

But what's going on year-to-date? What has to happen in each of those items going forward as you look to achieve 3% organic growth in 2018 and beyond?.

Yeah. Well, yeah. First, Jon, I would tell you that, the growth in the IS&GS business we're really pleased with, and in fact, that part of the business has grown a bit faster and performed a bit better on the top line than we had originally modeled.

With that said, the compare from last year on the legacy Leidos business, it's really a couple of things. One, as you might recall, we had a big build-out portion of the LCST program that gave us some unusually strong revenue in the Defense segment a year ago that did not recur this year. The margin on that revenue was very modest.

I think, the second piece of it, you would think about as being some Defense programs that went down relative to last year. But remember that, when we talk about how we're growing the business, and how we're investing, we're thinking about this more – certainly on a more consolidated level..

And then, just to pass the 3% next year.

What has to happen through your judgment?.

Well, the coming quarter for book-to-bill is always our seasonally best quarter, and achieving our own expectations on both the book-to-bill in Q3 and in Q4, as well as some of the revenue synergies that we've talked about at Analyst Day.

I think that, one of the wins that we just saw in the past quarter is kind of emblematic of what we were expecting in terms of higher Pwin on certain efforts that combine both the depths of the technical capability of Leidos particularly in biometrics along with deeper customer relationships that the combined business gives us, that's how we got to thinking about a target of 3% for next year..

Thanks..

Thank you, Jon..

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

Hey. Good morning, everyone..

Good morning..

Hi, Noah..

Jim, when you say, Health back-half should have more normalized revenue and margin; can you quantify that? Because hear you on why the margin was a little hot in the quarter, but it's been pretty close to the level it was at in the quarter, three quarters in row now, and similarly on the revenue, it sort of been in the same place sequentially three or four quarters in a row?.

Yeah. So as you know, Noah, we don't guide to margin – that is segment-specific results on revenue or margin.

But what I would tell you is that, the performance on a handful of contracts that – while those contracts aren't going away, the revenue run rate on those is going to go down a bit, and the contract extensions are priced at a level that would imply that the margins are going to come down, although we're still looking at strong margins for that part of the business going forward.

But just not – as we said during the prepared remarks, the 16.3% is not something that we expect to go into the second half..

Can you quantify, how much revenue you lose sequentially from those contracts?.

Noah, that would kind of violate our policy of not guiding the segment-specific numbers for the year..

Yeah..

So, I think we'll have to wave off on that one..

Okay. Fair enough.

The LCST build-out, when do you annualize that, such that it's no longer a year-over-year headwind?.

That should be around the end of the year..

Next year..

Yeah. Yeah..

So that's sort of a growth headwind 3Q, 4Q, and then ceases to be one as you start 2018?.

That's right..

Yeah. Yeah, yeah, yeah..

Okay.

And then just finally, how should we think about where 2018 cash flow from operations goes relative to 2017?.

Well, we'll certainly see it stronger from a couple of things; one, the first one is we will not have the same level of integration costs that are currently embedded in the $475 million plus number what we've guided to currently.

The second is that, our belief is that, by having the business or the bulk of the business, that is roughly 90% of it on a unitary financial system, we can see the same kind of billing acceleration and cash flow acceleration on the acquired business that we've been enjoying in the Leidos business.

So, it is – faster billing means faster cash, and we believe that we'll be able to accelerate the velocity of billing on the acquired business. So those are the primary drivers of enhanced cash flow conversion for 2018..

Okay. Thank you..

Thank you..

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

Yes. Thank you very much. Good results, guys..

Thanks, Cai..

So I think, on the first quarter call, you had mentioned that you've taken your rap rates down. I believe, you said twice as a result of kind of cost savings.

Could you comment on what have you done with your rap rates on your bids here in the second quarter and maybe year-to-date? And what sort of impact are you seeing it having on your book-to-bill?.

Let's see. Cai, as we look out, we'll probably have another update of the rates towards the end of the year. Those will also be favorable as we get our back-office systems aligned, and able to continue with synergies. And you know, in backlog, it has sort of a short-term and a long-term effect.

In the short-term, on our cost-type contracts, it can reduce backlog. But we think in the long-term, we become more competitive, and we expect our win rate to increase. And over the long-term, it's part of the formula that we have to get to the 3% CAGR, overall.

And of course, we also challenge our program managers when there's a windfall reduction on a contract with a specific customer to engage in dialogue with that customer on enhancements that we can provide and other value-added services to that contract to be able to get that, the program manager on the customer's side to enhance their mission or their program offering.

And so, we try to challenge our team to go back and capture the cost savings and added scope that's associated with a reduction in cost..

Terrific. And then, I think, on your first quarter call, you indicate Q3 the strongest book-to-bill and the full-year above 1. Maybe, if you could update us on both of those, and comment on re-competes. I gather you guys were unsuccessful on the NASA Mission Systems Ops bid. Thanks..

Let's see, as Jim said, third quarter's always our strongest, and we do what everyone else does. We've got a pipeline, we've got things in flow. We then, through a large systematic process, put probability wins against what's in the pipeline.

And we generate what our expectation is for third quarter, and that's what has led to confidence in an even stronger third quarter. There is a program at Johnson Space Center, the current contract is called FDOC.

Cai, as you alluded to, the re-compete modified that contract a bit, and gave it a new name called MSOC, the Mission Systems Operations Center (sic) [Mission Systems Operations Contract]. There was an announcement of that, the winner of that program. Another company was announced as the winner.

My recollection, I think, there were three bidders of which we were one, we were the incumbent. It is my understanding that that is now under protest. And as such, I can't comment much about it, because it's in that legal venue. I would only submit that, we've had that contract for a long time.

By the way, that's to support the Operations Center for the International Space Station. It's a historic legacy IS&GS contract. It's one that we've had very, very high award fees, and have done a terrific job on. We just moved the Mission Operations Center to new technology.

And I will say, as the protest evolves, we will see where that one goes, and where that may ultimately end up at this point is difficult to predict..

And lastly, maybe, you could give us some color on upcoming re-competes and maybe your bid pipeline by the three sectors? Bids outstanding?.

Yeah. Let's see, that's a tall order. Let me just say that our – we're happy with our pipeline. We don't see any re-competes that are significant or material. We're actually relatively happy with our win rate. As we have said at first quarter, I'll repeat again today, is some of the acquisitions still continue to be delayed.

We run about a $23 billion pipeline..

In evaluation..

Yeah, which is about where we want to be. And I don't see anything in our business development metrics or the pipeline or our win rate that causes me undue concern. In fact, obviously, I feel better today than I did at first quarter. It's still a very competitive environment. We've got to win business every day.

We're still focusing on how we can do that better. And for us, that's to find a way to differentiate ourselves from everybody else in the industry. And we're doing that really through those three points that I made on the call, through cost, through technological innovation, and then frankly making sure that we stay close to the customer..

Thank you very much..

Thanks, Cai..

Thanks, Cai..

Our next question is from the line of Robert Spingarn with Credit Suisse. Please proceed with your question..

Good morning..

Good morning, Rob..

Hi, Rob..

So I wanted to go back to the organic growth. You'd already talked about the fact that there's some tough comps in the legacy Leidos business, but you also, I think, mentioned that some of the strength at IS&GS was unexpected extension of work.

Is that the case?.

That's clearly part of it, it's not all of it. And the unexpected extension really relates back to this acquisition environment that we have described, and I've heard other describe is that new contracts are slow. So existing contracts are being extended beyond what we would have anticipated when we put the plan together at the beginning of the year.

We have been a beneficiary of the extensions, which has helped us, and always when they re-competed work, they do that to create competition, which can put pressure on margin. And so, we had existing business extended. It's usually with a favorable variance to the margin forecast that we would have predicted..

And it seems like with – given that you've tweaked up the lower end of the revenue guide, and we're halfway through the year here and well into the third quarter, you're pretty comfortable with your visibility on revenue here in the second half just given, again, some of these timing differences that seem to have surfaced?.

Yeah. Rob, I think, you've obviously nailed that one pretty well. Just probably, as you have a model, we have our model, and revenue for this year has got to be in a high-90s already in backlog.

Because of the time constant in our industry, it's just – even if we win a program , say, in the third quarter, and we ramp up, and we start staffing, it doesn't have a big effect on revenue in the year. And so, what you've alluded to is clearly correct.

We have high confidence in our revenue forecast for the rest of the year, because the majority – the overwhelming majority of that is already in backlog..

Okay. And then, just digging a little bit deeper, you talked about a bunch of the awards at the beginning, Roger, some of the new business.

Are there some good specific examples of revenue synergies coming through, programs that neither of you would have won alone?.

Yeah, there are – some of the interesting things we find in our new business is being twice the size, there are very few that are big material revenue movers. And so, on any given day, the $1,500 millions are coming in all the time.

There are some, and I was at an Analyst Conference a couple of months ago, and I talked about the NMCI, Navy Next Gen program, but that's probably 18 to 24 months out in the future as being probably a material contract that we can now bid on that we wouldn't have bid on before.

What we're finding now is like, I talked about the Biometric program is, because we got IDIQ vehicles that we didn't have, we've got technology that we didn't have. We have a more robust pipeline. We're bidding on a broader set of programs for the broader set of customers.

It's enhanced our position at places like FAA and CMS and Social Security and VA..

And then, I think, it's really very interesting that Frank Kendall has joined the board, and our experience with him, we always thought of him – and maybe this is incorrect, but he's a platform, program, hardware acquirer, if you will. Obviously, he was doing services as well.

But does this position the company maybe to go after a little bit more of that core Defense hardware or platform work maybe move a little bit differently than in the past?.

Wow, that's a – boy, that's an insight, I really hadn't given much thought to; let's see. We are thrilled that, Frank joined our board. Frank, as you know is, West Point grad, engineer, lawyer, has an MBA, has been in industry before he's been in government several times.

Although, he's got a clearly intimate knowledge of platforms because the government buys a lot of platforms, but in his role in AT&L, he bought hundreds of billions of dollars of services as well. I'd just tell you that he is very, very thoughtful board member, and I think, Jim would add, we are quite pleased that he has fully upped the speed.

He participates very actively in the discussions at the board level, and he brings insight just as our other board members do, here; John Jumper, who is Head of the Air Force, and others, and we're just thrilled to have him on the board..

Okay, just last thing on the VA contract, I think, you might have talked about it earlier. This is a continuation of work that you've already done. It's a multiple-award IDIQ. So this is different than what people have been trying to understand about GENESIS, and the equivalent award to GENESIS at the VA.

Is there anything you can update us on there?.

Well, okay. Let me spend just a second, and if you will, try to unpack that a little bit. The VA award that I discussed in my statement is not related to electronic healthcare records. It is actually clinical work that we do around veterans and their health.

And it is a program that came to us as part of IS&GS that they've had for some time that was in protest. That is actually divided by districts, that particular program, and you win and lose different districts. I think, they're up to six districts, and we won several of those districts, and others won other districts.

And then there is some competition around performance in that program. I would simply say, it had been in protest for at least a year, maybe over a year; it's out of protest. We're off executing. It's a program that we love because we support veterans and veterans' health.

I think in your question was a comment or a question really around electronic healthcare records the VistA replacement program....

Correct..

...I don't have a lot to say there.

I will tell you what the facts are as we all known them, that Secretary wrote what's called, Directions and Findings (sic) [Determination and Findings] which kicks-off an acquisition process to select the electronic healthcare records off the shelf commercial vendor that we are using as part of the Defense Health program.

In his D&F, he said that the VA will use that electronic healthcare records system for the transformation of VistA. All right, that's really the only news that we can report on. I think, the Veterans Affairs has said that, we are in negotiation with that party around how that program will look, and that, that process will take several months.

Clearly, Leidos has done installation of that healthcare records system for the Department of Health Affairs. We're in our second – we had our IOC site. We've done our second healthcare facility, we'll do two more this year.

And clearly, Leidos believes we can add a lot of value to the VA program, and we are poised and prepared to assist the VA in any possible way we can..

Thank you..

Yeah..

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

Hi, good morning. It's Rick Eskelsen on for Ed. Just wanted to follow-up to Cai's earlier question about bookings, kind of a two-pronged question.

First, Roger, in your script, I think, you sounded a little bit more cautious on the award outlook than what we've heard elsewhere in the industry, maybe if you can talk a little bit more about that? Is it just related to the slowness in terms of staffing up Presidential appointees? And then building on, beyond the cost measures that you've taken, can you talk a little bit more about how you've sort of revamped and brought together the business development approaches of the two companies; and if there's been any areas, especially within the legacy, IS&GS piece that you've been surprised by? Thank you..

Okay. I'll try to be relatively short, because that's a lot to talk about. First, not all companies count awards impact all at the same way. We believe, we have a fairly conservative philosophy around how we book IDIQs both multiple award and single award.

So as you compare our number with maybe two other companies that recently released, you need to get back to the definition. And I think, we're always trying to be conservative in the way we put our numbers forward. A little bit about business development. We have brought the two business development organizations together; we did that on day one.

We built a business development pipeline. We came to consolidated CRM system. We de-conflicted the pipelines. It was just something that we needed to do. And then we have organized any campaigns against the major pursuits that are in the pipeline.

There have been, and we have seen that acquisitions for which we expected decisions to have been made, have been delayed. In fact, we have seen nothing that has been accelerated yet, although there is some talk of that. The trend has been for things to be sole source extensions, for things to be postponed.

And the NMCI Next Gen program, our best read of that is it could be delayed a year. And it is in our pipeline, and we have probably pushed it out in our pipeline over a year. What are we doing? We're doing what you would expect. We're looking at our people, our processes and tools around business development.

We are looking at how we qualify in the pipeline to make sure that our pipeline is robust. And the good news is, we have a much broader set of customers for which to pursue new business, and that's been good.

But Gerry Fasano, who runs business development, and his team are spending a lot of energy to make sure that we are chasing things for which we have a competitive discriminator, either in cost or in innovation. And I think we've already started to see benefit from that. A program I didn't mention, but clearly is out there.

There's Army Field Artillery (sic) [Advanced Field Artillery] program that we refer to as AFATDS, Army Field Artillery Tactical Data System (sic) [Advanced Field Artillery Tactical Data System].

Again, another protest, another program that had been caught up in protest for a significant period of time, which we had hoped to have put in backlog earlier, which I think we've put in backlog, Jim, in the quarter. And it had been delayed at least a quarter, maybe two because it has been protested. But it was a nice win for us.

And one we won, I believe, because of innovation and a technological discriminator..

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

Thank you. Roger, you alluded to some detail about GENESIS.

Could you update us on the expected ramp in that program as you sort of get through the testing phase and roll out more rapidly?.

Yeah. And by the way, we are on track with the discussions that we have had previously on the MHS GENESIS or what we call the Defense Health Management Systems Modernization program. We have two more sites which we really kind of look at as IOC sites. This year, we did Fairchild Air Force Base.

We did Navy Hospital at Oak Harbor, and we have Madigan and one more site this year. And then we go into what's called waves, and we ramp up essentially to a wave a quarter over the next 12 to 18 months, which will put us sort of, we'll ramp up, and we'll be at sort of that peak installation level for several years.

And then, at the end of the program, we start to ramp down. So you will see an increase for us in 2018, and probably another increase in 2019. Very consistent with the discussions we've had on that program in the past..

Thank you. Our next question comes from the line of Krishna Sinha with Vertical Research. Please go ahead with your question..

Hi, thanks. You raised your integration cost target by about $40 million.

Is there any cash impact from that?.

Yeah. There will be, but it is not likely to be seen until 2018. Right now, the program for integration is running really, really well. And while the benefits are taking hold faster than we expected, we're running a little bit under budget, so far.

So when I think about that increase that we mentioned during the prepared remarks, that's going to happen next year, and I would think of that as maybe the top-end of what that estimate would be..

Thank you. The next question's from the line of Brian Ruttenbur with Drexel Hamilton..

Yes. Thank you very much. A couple quick questions. First of all, on bookings in third quarter. So you were weak in the first quarter, had good strength in the second quarter. I assume that seasonally, you'll have kind of peak book-to-bill in the third quarter, and then a drop-off in the fourth quarter.

Is that what you anticipate?.

Let's see, that's typically and historically what we have done. And we don't guide on bookings, but for all the reasons, our government customers tend to be cyclical. They try to get things under contract before the end of the fiscal year. That's our expectation..

Okay.

And as a follow-up, just on re-competes over the next 12 months, what percentage of your base is up for re-compete?.

Typically, going into a year, what we've said before, and I think it still holds is that about 80% going in, we have visibility on it, either as run-off of existing backlog or follow-on work.

So typically, about 20% of our annual revenue though, because the average contract life is five years, think about 20% of a given year's revenue going into the year, is coming from re-compete..

Thank you. The next question is from the line of Jon Raviv with Citigroup..

Hey. Thanks for squeezing me in for a quick follow-up. Can you just give us a sense on – on the first quarter call, you mentioned some unanticipated losses. I'm not sure if the NASA loss was one of those, or if that was incremental, and to what extent you anticipated it.

But you also suggested that you were going to do a bit of a postmortem after those 1Q items.

Can you give us an update on kind of what you uncovered, and what you're doing to address that and how you see your re-compete win rates, perhaps, trending going forward?.

Okay. Let me be accurate and factual. The NASA MSOC program was a second quarter event, not a first quarter event. Now, let's again unpack that by saying, any time you're in a competition, expect to win. I think that's a strong statement. We're always – when we're in a competition, we always get a feel like we're in a competition.

And I would like to think that we never go in and say, well, this is ours and we expect to win. The forensics are, did we write a proposal that reflected our capabilities, and were rescored by the Source Selection Board appropriate with the quality of innovative solution we put on the table; that's sort of what we assess.

And in those competitions where I have been disappointed, I felt like we had a superior solution, we had some great technical differentiators, but we didn't get that – I don't think we got full credit in the evaluation.

And so, that causes us to go back and say, all right, are we writing good proposals? Are we highlighting our differentiators? Did we get a good understanding of what we call Schedule M, which is the evaluation criteria in a proposal.

And sometimes you worry about, well, if you're the incumbent, you can get a little comfortable that your discriminators are well-known by a customer, and you may not be as precise in your proposal as you need to be, those are kind of the things that we look at from a forensic standpoint.

Did we write a good proposal? First of all, do we have an outstanding solution? And I think, we've always proposed outstanding solutions.

But then, did we mechanically get that outstanding solution well-documented in the proposal that we submitted to the customer such that they evaluated it high, and we got high evaluative credit, in the way the SSEB, the Source Selection Evaluation Board, grades the proposals.

And that's what we look at, by the way, we do forensics on all of our proposals, the ones that we win and the ones that we lose. And we try to understand what did we do well on the ones that we win.

And when we lose one, where we thought we had an advantage because we deal with the customer well, we knew the solution, or we thought we had a piece of technology that should differentiate us.

And we don't win, we always go back and say, okay, what was it that we didn't present well to the customer, and how can we do that better in following proposals..

Thank you. At this time for closing remarks, I will turn the floor back to Kelly Freeman..

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

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