Leidos Holdings, Inc. (LDOS) Earnings Call Transcript & Summary

Good morning, and welcome to the Leidos 2020 Annual Meeting of Stockholders. I would now like to introduce Roger Krone, Chairman of Leidos Board of Directors and Chief Executive Officer.

Thank you. On behalf of the Board of Directors and Leidos management team, I would also like to welcome you to this Annual Meeting of the Stockholders, and thank you for your interest in the company and for your participation today. We're holding this year's annual meeting in a virtual-only format via the Internet due to the continued public health impact of the COVID-19 outbreak to comply with government advisories limiting public gatherings and to support the health and well-being of our stockholders and employees. I will be acting as Chair of this meeting; Ray Veldman, the company's corporate Secretary, will be acting as Secretary; and Jim Raitt from American Election Services, will be acting as the inspector of election. Stephen Theuer from Deloitte & Touche, the company's auditor, is available to answer appropriate questions. I welcome members of the Board who are joining us virtually today: Greg Dahlberg; Dave Fubini; Miriam John; Frank Kendall; Bob Kovarik; Harry Kraemer; Gary May; Surya Mohapatra; Larry Nussdorf; Bob Shapard, who is our lead -- our independent lead Director; Susan Stalnecker; and Noel Williams. Today's meeting agenda is posted on the meeting site. While today's meeting is virtual only, we welcome questions from our stockholders that pertain to the proposals being voted upon. Stockholders may submit questions at any time during the meeting in the space provided on the meeting site. In the interest of ensuring that our meeting is efficient, and we provide stockholders with the opportunity to have their questions addressed, we intend to respond to the questions submitted only during the Q&A session at the end. Please remember that you may vote your shares online at any time during this meeting prior to the closing of the polls. Please note that we rigorously observe the rules of conduct that are posted on the meeting site. Specific questions about the company's current business results, trends or current year outlook will be deferred to our upcoming earnings announcement on May 5. At this time, I would like to call the Annual Meeting of the Stockholders to order. Mr. Secretary, was the notice of this meeting properly sent? And is a quorum now present?

Yes. The notice of this meeting, along with related proxy and annual report materials, was mailed or made available on March 20 to the company's stockholders of record as of March 10, 2020, the record date for this meeting. A notice of the change of location to a virtual-only meeting was announced on April 10, 2020. A majority of the shares outstanding as of the record date is represented at this meeting. A quorum is present for the conduct of business. A list of the stockholders of record as of the record date is available for inspection during this meeting by any stockholder using the registered shareholder list link on the website used to access this meeting.

Thank you. The annual meeting of the stockholders is now officially convened. The polls are open, and all Leidos stockholders entitled to vote at this meeting have the ability to do so online. If you are a stockholder entitled to vote and have not yet voted, or if you want to change your previously cast vote, please do so via the website used to access this meeting. Please remember that if you have already voted by proxy, it is not necessary to vote again. After voting has been completed on all matters on the agenda, we will close the polls and the inspector of elections will provide his preliminary report. We'll move now to a review of the proposals. The first item is a proposal to elect 13 directors to serve 1 year terms ending in 2021. The nominees are: Greg Dahlberg, David Fubini, Miriam John, Frank Kendall, Bob Kovarik, Harry Kraemer, Roger Krone, Gary May, Surya Mohapatra, Larry Nussdorf, Bob Shapard, Susan Stalnecker and Noel Williams. Information concerning their principal occupations service as Leidos Board members, skills and qualifications and other matters that may be of interest are contained in the proxy statement. No other nominations were received prior to the deadline established in the company's bylaws. Therefore, no additional nominations may be made at this meeting, and I declare the nominations to be closed. The second item is a proposal to approve executive compensation by an advisory vote. The third item is a proposal to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for the year ending January 1, 2021. The fourth item is a proposal to amend the certificate of incorporation to eliminate cumulative voting. The fifth item is a proposal to amend the certificate of incorporation to eliminate super majority voting provisions. And the sixth and last item of business is the stockholder proposal submitted by Kenneth Steiner regarding stockholder proxy access. A description of each item, the Board's recommendation and its rationale for that recommendation are set forth in detail in the proxy statement. We will now connect with Mr. John Chevedden, representative of Mr. Steiner, to hear his statement. Out of respect for the other stockholders in attendance and to allow ample time for Q&A, we ask you to please limit your comments to a period of 3 minutes. Mr. Chevedden, you're now online.

Hello, this is John Chevedden. Can you hear me okay?

Yes, we can. Good morning.

This is proposal 6, make shareholder proxy access more accessible. Shareholders request that our Board of Directors take the steps necessary to enable as many shareholders as may be needed to aggregate their shares to equal 3% of our stock or that would equal $420 million worth of our stock owned continuously for 3 years in order to enable shareholder proxy access. That's a very high barrier, $420 million worth of stock owned continuously for 3 years. And the current limit is 20 shareholders have to come up with that in order to exercise the right of proxy access. Proxy access for shareholders enables shareholders to put their own director candidates on the company ballot to see if they can be elected. A competitive election is good for everybody. This proposal can help ensure that our management will nominate directors with better qualifications in order to avoid giving shareholders a reason to exercise their right to use proxy access. The largest shareholders can be the least likely shareholders to use proxy access to nominate directors. It can be more complicated for large shareholders to use shareholder proxy access. There is a growing awareness of this reality. That is why it is necessary to raise the current limit of 20 shareholders who would have to own $420 million of our stock. If they're $1 short, right now, they couldn't ask a 21st shareholder to join them to equal $420 million of our stock. It is also good to update our proxy access because the current version of proxy access has a needless restriction that requires a candidate to obtain 25% vote, the first time he or she is on the ballot. This could disqualify really a candidate because shareholders might believe the candidate is more than qualified, but feel that the timing is not right. A year later, shareholders could give a majority vote to such a well-qualified candidate because they are convinced that the timing is right. Under this proposal, it is likely that the number of shareholders who participate in the aggregation process would still be a modest number due to the administrative burden on shareholders to qualify as one of the aggregation participants, which is currently limited to 20. Plus, it is necessary for management to reject potential aggregating shareholders. The administrative burden on shareholders can lead to a number of minor errors by shareholders that management can use to reject applicants. One objective of this proposal is to make the corporate governance of Leidos Holdings more competitive, like the 2019 shareholder proposal that was supported by 92% of shares and became the preceding item to be voted on today, proposal 5. So please vote yes, make shareholder proxy access more accessible, proposal 6.

John, thank you. Since everyone has now had the opportunity to vote, it is now 9:11 a.m. Eastern Daylight Savings time, and the polls are now closed. I will now ask the inspector to report on the preliminary results of the voting on the proposals.

On the first item, each of the director nominees has received the necessary votes for election as director. On the second item, the stockholders voted on a nonbinding basis to approve the compensation of the executive officers as described in the proxy statement. On the third item, the stockholders voted to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for the year ending January 1, 2021. The fourth item, the stockholders voted to approve the amendment of the certificate of incorporation to eliminate cumulative voting. On the fifth item, the stockholders voted to approve the amendment of the certificate of incorporation to eliminate super majority of voting provisions. On the sixth and last item, stockholders voted against the stockholder proposal regarding stockholder proxy access. And that is all, Mr. Chairman.

Thank you, Inspector. The final voting results of today's meeting will be reported on a Form 8-K filed within 4 business days of this meeting. That concludes the formal business, and I now declare the meeting adjourned. We will now conduct a Q&A session where we will address the questions that we have received from our stockholders through the virtual meeting platform. I invite you to continue to submit any questions you may have regarding the company and its business. Please follow the instructions provided on the virtual meeting screen. As a reminder of the rules of conduct, each stockholder is limited to 2 questions. In the interest of time, we may summarize the question, and we'll also group questions together that cover the same topic. If we do not get to your question before we run out of time, or if you have additional questions after this session, please feel free to reach out to our Investor Relations group. Their contact information is on our website.

Roger, we have received a few questions about how Leidos is dealing with the COVID-19 pandemic.

Great, Ray. Thank you. The global pandemic is affecting everyone, although our business at Leidos has been less impacted than many of the other businesses because of the nature of the work that we do. We support national security and critical infrastructure, and so we are exempt from the government orders restricting business activity that have severely impacted other industries. Still, we have been carefully managing the impacts of the virus on our people, our customers and our community. Our primary focus remains the health and safety of our employees and their families. Early in the crisis, we established working groups to bolster our existing business continuity plans through several key actions. First, we were an early adopter of travel restrictions, social distancing, enhanced visitor screening and other measures to help protect our people. We also rapidly expanded our telework capabilities so that approximately 65% of our employees are now working from home. Additionally, we adopted a number of enhancements to our health care benefits to make it easier and less expensive for our employees to be treated. While the impact on the company is low, regrettably, some of our valued employees are currently affected by stop work orders or the virus itself. To help in these areas, we have expanded our existing Leidos Relief Foundation to include the new Keith W. Redding memorial fund dedicated to assisting employees who have been directly impacted by the virus. Both are funded by employee donations. We'll talk more about the impacts of COVID-19 on our business during our quarterly earnings call next Tuesday at 8:00 a.m. For now, I'll say that these challenging times have not impacted our commitment to our customers' mission, which we are continuing to perform.

Okay. Mr. Chairman, those are all the questions we have for today.

Ladies and gentlemen, that concludes our Q&A session. I thank you for attending today's meeting.