Q1 2020 Earnings Call

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For calling in from conferencing. The next available conference will be with few momentarily.

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Thank you for calling income conferencing the next available.

Specialist will be with two momentarily.

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Hi. This is the conference Interbody have you for same please.

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Yes.

Hello.

David.

Hi, David what does your line is David.

Brad.

You saw the last thing for me, David you're cutting it up just a bit.

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Our next with this.

[laughter] [laughter] well yeah.

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Holdings earnings call.

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Yes.

And what kind of what company do you work for David.

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Yeah, David I'm, having a hard to understand how you're cutting in and out what was the company name again.

[laughter] Ida <unk> E R right.

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My next to labor at approximately 30% topline growth in the quarter demonstrating that business is strength in fast growing strategic areas, such as Hypersonics space exploration an unmanned systems.

Just last week.

Our next was awarded one of three prime contracts by NASA.

Under the Artemus program to develop a human landing system through the preliminary design phase.

Our contract consists of two phases.

10 months base period for preliminary design valued north of 250 million followed by a down select two to contractors for a four year option period to build and send all land or to the moon.

This win will be captured in our second quarter bookings and backlog.

Following the theme of M&A activity yesterday, we announced a closing the acquisition of L. Three Harris's security detection in automation businesses.

We are excited about what this acquisition means for our future any high growth ever expanding global security market.

Well cobot 19 is causing a temporary impact on airlines and airport traffic volumes, the lower traffic scenarios are actually, causing many airports to consider pulling in upgrades and maintenance activity. During this unseasonably slow traffic period.

After careful review of first quarter results and the businesses pipeline, including recent discussions with key customers and prospects. We remain confident that this transaction will create significant value for leidos our customers in our shareholders.

We welcome the 1200 employees to the light owes family and look forward to updating you on our integration and synergy activities over time.

We continue to expect this acquisition to be accretive to revenue growth adjusted EBITDA margins and earnings this year.

Jim will provide more details on this later in his remarks.

As of today, reflecting both acquisitions are estimated at net leverage ratio is 3.7.

As we have stated consistently in the past our target net leverage ratio is 3.0 and as such our capital deployment philosophy will prioritize debt reduction until we approach that level, while sustaining our quarterly dividend and funding important capital and.

R&D investments to continue to drive growth.

From an organic growth perspective, I'd like to highlight a couple of notable programs from the quarter that reflects the successful defense of to protest in our defense solutions segment and one in our civil segment in all three cases Leidos is the incumbent.

The first is the global solutions management operations or give some low to contract where we continue to manage a series of networks and computer systems that serve as the backbone of the department of Defense is commanding control systems.

His tenure single award IDI Q contract has a ceiling value of 6.5 billion. If all options are exercised.

Note that the GSM mode to contract has yet to contribute materially to our backlog and we'll do so over time as new task orders are issued.

Second the protest of the department of Energys Hanford mission essential services contract was also resolved in our favor.

The 10 year single award IDI Q contract has an approximate value of 4 billion. If all options are exercised.

Finally, the Air Force National Capital region, or ATF NCR information Technology service support contract was also successfully defended.

Under this five year 450 million single award IDI Q contract.

We will continue to provide a full range of support and services to our nation's command and control systems and I T support for thousands of users.

During the Cobot 19 crisis, we are enabling teleworking capabilities through hardware software and cloud based service deployments.

To support our businesses continuing growth our talent acquisition efforts continue to attract and higher 100 or more new employees each week.

We hired over 1800 in the first quarter.

This result is made possible by our recruiting and onboarding programs, which adopted a number of virtual practices well before the current cobot 19 crisis.

Turning now to covert 19.

This global pandemic is affecting us all.

Like those we have been carefully manage the impacts to our people our community our business partners and our customers.

We have implemented changes to our business rhythms to maximize telework, where possible and minimize risk to our employees.

We have revisited and improved certain healthcare benefits for our employees to minimize the burden on them and their families. During the crisis.

I am proud to report that the whole light owes family from employees up through the board have stepped up to offer aid in their communities through generous donations.

Since the start of the outbreak employees have donated nearly $400000 to the lighters relief foundation to assist our colleagues who have been directly impacted by the virus last week, our board of directors unanimously approved a reduction in director compensation for the current year.

As a result of this decision the company will contribute half a million dollars to the relief Foundation.

Additionally, I have donated my salary to the relief foundation during the pandemic.

Externally that company has contribute contributed more than 250000 with a commitment to match up to an additional million dollars of employee donations to the all of US combat Corona virus campaign created by the U.S centers for disease control.

And prevention Foundation.

Our customers recognize the critical nature of the services that we perform and the overwhelming majority of our work remains without impact.

We have identified approximately 270 million of revenue or about 2% of our total for 2020 that is expected to be impacted by cobot 19.

Much of which we expect to recover in 2021.

The passage of the carriers Act does provide some relief for us in our industry peers. However, since this specific implementation is left to the discretion of contracting officers, we're not allowed to bill fee on certain contracts, where the workforce is capped at.

Home in a ready state.

This is the cause for the majority of margin reduction in the defense solutions segment.

To minimize business impacts and to continue to deliver innovative solutions in a cost efficient manner. We have implemented a number of cost cutting measures across the organization.

These actions include reduced discretionary spending an indirect hiring freeze of non essential open positions and mandatory time off on alternating Fridays for indirect staff.

In a few minor areas, where we have seen reduced business volumes furloughs have been implemented.

Beyond this is worth highlighting that lyda supports many customers who are in the news today for their efforts on addressing that pandemic, including NIH CDC FDA and others. We are unique among our peers in the breadth of our health capabilities and have been engaged with all of.

These customers and more to leverage our capabilities to directly help combat the pandemic.

First on behalf of the NIH is national Cancer Institute, our subsidiary Lighters buying at Biomedical Research staff and operates the Frederick National Laboratory for cancer Research, which is dedicated exclusively to the biomedical sciences.

Frederic National Laboratory scientists have been working directly with the NIH to facilitate an international therapeutic trial Abram does have year in coated 19 patients.

Second the Frederic National Laboratory scientists are also conducting research to identify.

Genetic determinants of virus susceptibility and outcomes, hopefully leading to better therapeutics and medicines to combat the virus.

In other parts of our health business, we have been exploring opportunities to develop and offer virtual care solutions, which support the complete pandemic pathway from patient intake and prescreening through virtual visits with staff physicians via remote monitoring within the hospital or.

Other care environments.

While these are challenging times for all of US the mission essential nature of our work the additional protective measures in the carriers Act and the significant actions. We are taken as a company provide a strong foundation for our business as we manage headwinds entering the second quarter.

Jim will give more detail on our revised guidance, but in short after reflecting both the expected cobot 19 impacts as well as offsets from the inclusion of the L. Three Harris security acquisition, our revised guidance enables us to maintain our cash flow from operate.

Patients guidance at the same level as before at a billion dollars or higher while decreasing revenue by 1% and earnings per share by 6% at the midpoint of our range.

From a macro perspective physically or 20 ones budget levels for both defense and non defense spending are set under the bipartisan budget agreement and Congress does not plan to change those levels. Despite the unprecedented spending increases being enacted to offset the economic impact.

Act of Cobot 19.

Consequently, there should be more certainty in the budget process. This year, even though we expect physical year 21 to start underwriting a continuing resolution due to the November elections.

Longer term, however, deficit pressures could impact both defense and domestic spending levels potentially starting as early as physical year 2003.

But again, the 18 to 24 months delay from budget dollars to outlay dollars does still provide us with runway before we are potentially faced with that dynamic.

Further deo DS and obligated balance of over 100 billion could mitigate the impact of any future cuts to budget authority in the first one to two years of a downturn scenario.

Finally in closing I'd like to comment briefly on the transition in our Investor Relations team.

Peterborough was recently appointed as head of our IR team and brings over 25 years of experience across numerous financial departments within Lockheed Martin and light OWS, where he most recently served as CFO of our health group.

Peter succeeds Kelly Hernandez, who after six years as our IR lead was recently named the new CFO of our civil group.

I'd like to thank Kelly for her many contributions in her prior role and know she will be a great asset to the civil group.

With that I'll turn the call over to Jim Reagan, our Chief Financial Officer for more details on our first quarter results and our full year outlook.

Thank you Roger and thanks for everyone joining us on the call today I'll start by sharing some highlights from the quarter and then ill provide some color on what we see has the potential impacts on coded 19 for the remainder of the year in the context of our updated guidance.

Beginning with revenue, we're pleased with our strong start to the year first quarter revenues grew 12.1% over the prior year and 8.2% organically continuing our growth momentum into 2020.

The increase in revenue was driven by high levels of on contract growth and increased contributions from new programs that ramped up during the quarter.

These increases were offset by a slowdown in programs related to covert 19, which caused an approximately 50 million dollar impact to the quarter's revenue.

Excluding this first quarter organic growth would have been 10% over the prior year period.

Adjusted EBITDA margins of 9.3% declined 80 basis points from the prior year quarter.

The decline was characterized by two events. The first was what I would characterize broadly as covert 19 related particularly impactful in our defense solutions segment programs ability to perform.

Build with the inability to recognize fee on the maintenance of ready state labor.

This impact as approximately $9 million to adjusted EBITDA.

The second item as an $8 million charge related to an international receivable after adjusting for these discrete items adjusted EBITDA margins would have been more in line with historic company levels.

Non-GAAP diluted EPS for the quarter increased six cents over the prior year to $1.19, primarily reflecting a lower non-GAAP effective tax rate and lower share count.

Operating cash flows of 372 million were above seasonal norms and reflect the continued diligent management of our working capital as well as the implementation of the accounts receivable monetization facility, which we discussed previously which contributed nearly $140 million in the quarter.

We had another strong quarter in business development, resulting in bookings of over 5.5 billion, bringing our book to bill for the quarter to 1.9 X and a record ending backlog position of 28.3 billion.

This outstanding backlog number reflects the successfully defended protests on the Hanford and a FNC our contracts as well as our continued success in competing for new programs and takeaway opportunities.

Before I get into segment results I'd like to point out that effective at the start of 2020, we redesigned several programs from the civil reportable segment.

To the defense solutions reportable segment to better align segment operations with the customers they serve.

The net impact was that programs worth a total of about 1 billion of annual revenue moved out of civil and into the defense solutions segment.

The 2019 financials have been recast to reflect the new structure for our year over year comparison and had been provided to you in the supplementary financials file on our website.

Now for an overview of our segment results.

Defense solutions segment revenue grew 14.4% on a year over year basis, reflecting 5.7% organic growth and two months of contribution from dynamics.

On a pro forma basis for the full quarter dianetics experienced approximately 30% growth compared to the prior year period.

These strong growth rates take into account cobot 19 impacts that affected some of our intelligence programs in the latter part of the first quarter.

We expect these programs to return to their normal run rates during the third quarter.

Non-GAAP operating margins of 6.8% in our defense solutions segment, or uncharacteristically low declining 120 basis points from the prior year quarter.

The current quarter margins reflect $7 million associated with programs impacted by KOVA 19, an increase in indirect expenditures Anup reserve for a potential 8 million dollar receivables write down on an international program.

Defense solutions booked over 1 billion of net awards.

Resulting at a book to Bill of 0.8 acts in the quarter and 1.6 X on a trailing 12 month basis.

The recent successful rough resolution of the protest on the GSM owed to contract has not yet impacted these metrics due to our booking methodology. However, as we receive task orders on this idea Q contract later in the year the backlog will reflect those new bookings.

And our civil segment revenues grew 5% from the prior year quarter and 6.9% organically.

This growth was driven by the increased contribution from the ramp up of new programs and volume growth on our existing programs.

This growth was partially offset by the sale of our commercial cyber business last year.

Non-GAAP operating margins in the civil segment were strong at 10.9%.

The prior years margin of 12.4% reflected a number of nonrecurring items that resulted in a higher than usual amount of write ups combined with higher volume in our security and transportation systems business.

While the first quarter of 2020 saw lower product volumes and mix, we look forward to driving more value in this higher margins segment with the addition of the L. Three Harris secured detect security detection and automation businesses.

Civil generated nearly 4 billion in net bookings in the quarter for a book to Bill of six point Onex.

This was largely driven by the positive impact from the successful resolution of the protest on the Hanford contract.

And finally, turning to our health segment revenues grew 14.5% over the prior year period, 18.5% organically after adjusting for the divestiture of the commercial staff augmentation business.

This strong organic growth was due primarily to increased program volumes and expansion of scope on our existing programs.

Non-GAAP operating income for the health segment grew 360 basis points to 15.5% from the prior year quarter due to a shift in program mix.

Our health segments saw approximately 250 million in bookings in the quarter driving a book to Bill of Zero point Fivex with the trailing 12 month book to Bill of 0.9 acts.

And now onto the remainder of the year.

We're updating our 2020 guidance for revenue adjusted EBITDA margin and non-GAAP diluted EPS to include. The addition of the L. Three Harris security detection and automation businesses.

And the expected impacts to our business from covert 19.

We're adjusting our revenue guidance to a range of 12.5 to 12.9 billion.

The updated range reflects 13% to 16% growth over the prior year.

This range includes approximately $290 million of revenue contribution from the security detection and automation businesses offset by approximately $370 million of expected impact from coated 19 and other associated market uncertainties.

Note that we expect our cobot impacted programs to ramp back up to our normalized run rates during the second quarter resuming full run rate in the fourth quarter and then continuing on impacted into 2021.

We also anticipate that we will start to make up some of the lost revenue from Q1 in Q2 during the latter half of 2020 and into early 2021 as employees are able to return to previously closed customer work locations.

With the abatement of the Cobot 19 impacts beyond the fourth quarter combined with the strength of our backlog in recent awards position. We're confident that we will achieve high single digit organic growth in 2021 with margins at or above our 10% adjusted EBITDA margin long term target.

In terms of margins, we expect adjusted EBITDA margins of 9.8% to 10% for this year.

The primary drivers of the 20 basis point reduction from the prior range included includes an estimated value of approximately 30 basis points associated with coded 19, offset by the approximate 10 basis point increase from the inclusion of the security detection and automation revenues at accretive margins.

Specifically coven 19 is impactful from a margin perspective in a few different ways.

First the revenue headwinds we are currently experiencing in our high margin our higher margin generating businesses.

We expect to begin increasing our volumes back to normal run rates in these portfolios beginning in the second quarter.

Second some of our customers are only reimbursing costs and not fees associated with maintaining ready state labor on certain programs.

This is impacting margins on some intelligence programs within the defense solutions segment.

And third as mentioned earlier, we expect to begin ramping back to our historical run rate in margin mix across the enterprise beginning in the second quarter of 2020.

Our expectation is that we will be at normalized margins in the fourth quarter and continuing into 2021.

These revenue and margin changes result in an updated non-GAAP diluted EPS guidance range of $5 to 5030 cents.

Our non-GAAP diluted EPS guidance.

Range includes modest accretion from the as DNA transaction.

And we expect the accretion from the transaction to increase beyond 2020, as we undertake integration activities and begin to realize revenue and cost synergies.

As Roger indicated our guidance for operating cash flows remains unchanged at 1 billion or more for the year.

As a reminder, our capital deployment efforts are focused on debt reduction rather than share repurchases until we approach our target net leverage ratio of 3.0 acts, which we expect to do by the end of the first quarter of 2021.

Let me provide you with a couple of additional comments to help you with modeling.

We expect net interest expense for the full year of 197 million inclusive of the L. Three Harris security and detection and automation transaction.

We also expect a slightly lower non-GAAP tax rate in 2020 of 22%.

Before we turn it over for questions I'd like to mentioned that for the third consecutive year Leidos has been recognized as one of the 2020 world's most most ethical companies by the Ethisphere Institute, a global leader and defining and advancing the standards of ethical business practices.

Leidos is one of only 132 honorees from 21 countries and 51 industries to receive this recognition and this award would not have been possible without each and every one of our employees committing to do what is right every day.

With that I'll turn the call over to Rob. So we can take some questions.

Thank you will now be conducting a question and answer session.

I wanted to ask a question today. Please press star one from your telephone keypad and a confirmation total indicate your line is in the question Q.

Let me first starting with you later move your question from the Q.

Just considering speaker equipment, it may be necessary to take after handset before pressing the star Keith.

One only so we pull for questions.

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

Hey, Thanks, good morning, everyone.

Roger.

You talked about some of these items of there's demand destruction and potentially in some areas that could be demand destruction can you parse between those two those does two dynamics there it sounds like it's mostly disruption, but you didn't mention some some some some potential shortfalls that could because maybe with us for longer.

Okay.

I'm trying to understand your question, let me, let me take a shot and if I don't get it.

So.

I think we were pretty clear both Gemini that we don't see significant long term impact as a result of cobot 19, which is what I think your question was.

Most of what we saw.

A little bit into in Q1, but mostly in the month of April except for the 36, 10 fee, which will never get back because we're only being reimbursed for costs not fee. We see in almost all of that revenue and therefore earnings just move into the right.

And we'll either pick it up in third quarter fourth quarter or at a roll into 21.

For instance, as you all know we do a lot of work at hospitals right. Our our defense Health program is installing.

The new Cerner millennium software at hospitals, those hospitals are now being used for coated 19, even those at military bases as such we're not getting access to the hospital right now and so we are slowing down our deployment.

But those deployments will still occur there just move to the right.

By a quarter or so and so our dim sum program will pick back up in fact, it's already starting to gain momentum again and should be fully back and third or fourth quarter. So we're not.

John I I.

I don't.

Fully vice said that we saw a permanent impairment of our business and I I. If you heard that in my comments, then I apologize I.

Clearly we have seen impacts in the month of April button, but the vast majority of our impact is either of the earnings releases on 36, 10 or revenue and earnings that have been delayed.

Back to you John not.

Thanks, Roger not immune to apply that you said I just want to make sure we're perfectly clear on the on the disruption idea here, but I was getting at though a little quick follow up here is just you did bring up the idea that going forward. How maybe in 2020 345 lets say deficit start to become more of an issue discretionary spending can be pressured in your big business.

Charles operating that big market on how do you think about the company positioning for what that long term spending environment could be because it's still going to be mission essential spending.

How do you position for the with those priorities and consistent with those parties are going to be yes, John we're really pleased with how we have repositioned the business over the last five years to be in parts of the market that we think or more resilient to what will be eventually a cyclical.

Flattening of government spending we have moved into.

Mission essential digital transformation of areas and have diversified from.

A concentration in DMD to where we now have essentially our four markets and defense Intel health and civil infrastructure. So we.

We're really pleased with how we've restructured the company in how we position ourselves for the market's going forward and.

If the department of defense slows in growth I think we will see a lot of civil infrastructure projects. You know how we do inspection at airports is going to change with social distancing and we are well positioned to take advantage of shifts in spending in that direction.

Thank you.

Next question is from the line of met acres with Barclays. Please proceed with your question.

Hey, good morning, guys. Thanks for the question.

I will just can't comment a little bit wireless security detection business I know Roger you mentioned, you're maybe seeing some demand or during this fiscal period, but I mean, how much of that business you think of its kind of.

Types user air travel run rate and it kind of just seeing sort of an unprecedented downturn there that so how much of it is sort of that versus kind of longer cycle.

Stuff that you guys are booked already yes as.

Over the period of signing to closing, we've gone out and touched all of.

Our traditional long term customers and the new long term customers that come to us by way of the L. Three Harris acquisition, we really wanted to and understand what there.

Capital spending plans were and what their view of technology was and by going to use. This is a funded through TSA. There are some markets where the.

Inspection function is funded by ticket surcharges.

And it's a mixed as you go country to country.

What we heard across the board was up movement that new technologies.

Social distancing at checkpoints.

Key scanning of the addition of biometrics, which have very very few of airport checkpoints and have today, whether that be facial recognition temperature scanning and really what.

Has gotten US excited is I think this is going to us bond a recapitalization of checkpoints.

We are talking to one customer that said, we put ultraviolet lights in the tray return conveyor so that we could sanitize the Trey as it comes back around and as presented to the next traveler all of that as capital investments all of that really plays well.

Now with the L. Three Harris business that we've gotten and of course, our traditional business was very strong imports and borders and this only accelerates the need to do have inspection of at the ports and borders as.

We want to have control of the border, but we want to be able to tell.

Not only who's coming across but now there are some aspects about do they have a temperature things like that so where are we were very very excited about L. Three Harris business back when we signed a deal in early February and the world events have only made us more excited.

Great. Thanks, that's helpful.

I guess just one other on.

NHS Genesis has been ethical press reports that the maybe some delays in that program are those impacting you and what sort of the run rate that you guys.

As I as I made my comment to John because those hospitals and even the ones at military bases have been dedicated to covert 19 or lease put in a ready state.

So.

We have.

I had to do more work off Prem add to get ready for deployments.

And we're doing some other work on behalf of DHL as well with our team, but there has there has been an impact that we've seen slowing of our deployment, maybe I'll, let Jim comment, yes, Ed as you know there was supposed to be a peak in the deployment activity late this year early next and now with the rescheduling.

It's clearly that peak is being pushed out into 2021, as we kind of risk rejigger are scheduled to accommodate close.

The the use of the hospitals for covert 19 patients.

Okay got it. Thank you thanks, Matt Thanks, Matt.

Thank you.

In the interest of Simon slow as many as possible ask questions. We ask you. Please limit yourself to one question and one follow up question.

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

Hi, Good morning, Hey, good morning, Rob.

Roger you talked about the work that you do with NIH that directly touches on the pursuit of a cure or therapeutic for for Cobot 19 could you talk about the materiality of that revenue, where it stands now and could that be a meaningful a needle mover as we move forward and then really as a follow up.

That higher level, how should we how should the market think about lighthouse given that you have a healthcare segment.

And just the long term ramifications of the federal response to this disease.

Okay, Let me start with the easy one of the Bill the work we do add.

Frederic National Laboratory for cancer research as part of RF R&D support contract and although we believe it's very important to the country and it is a great.

Past performance Qual for us it is never been for of 12 $13 billion accompany a material set of numbers. So it's just it's just not and it has to do with the way that contract for 40, Cesar structured and how we how we book.

That being said the work we believe is highly important and it provides credibility for us across our healthcare segment.

And longer term.

We like being in the healthcare segment, we view that as a significant growth more market for us. It is as you all have seen our highest margin market.

It says that our customers value, what we bring to the market there and we continue to invest and to grow in that marketplace and.

Your question about the federal response.

I will make this statement and and I am really proud of what the organizations that we work with have done in response to the pandemic.

This is unprecedented and and predicted.

And.

Every organization that we work with whether they are at NIH or NCR, frankly, our DSD and Intel customers have all lean forward, we're doing virtual customer meetings by phone were doing zoom chats and across the board.

There are lot of people who are critical out there is not us where we are thrilled with all the hard work that all of our customers have done to try to keep our workforce employed and paid and at combat.

The pandemic and to take care of their employees in our employees.

I guess, where I was going with that Roger was once we're through this if they set up some kind of a federal pandemic office.

To try and prepare differently, let's say for next time.

We think we have a.

Significant advantage.

And part of why we do F.F.R.D.C. work is to have your knowledge of the environment and you know how therapeutics are created and how that scenes are created.

Rob as you May know were heavily involved in the <unk>, a vaccine and a worldwide effort to eradicate Ebola off the face of the planet and although it doesn't generate.

No significant profit away some of our other large programs do it gives us great credibility as as we pivot to support what may very well may be a federal response or permanent federal response to future potential pandemics.

Okay. Thank you. Thank you.

Next question function line of <unk> with Kelly, Please just easier question.

[noise], yes. Thank you very much so Roger you talked about 270 million of cobot impact and yet the guide has 370, which would imply about 100 million for other quote unquote market certain games could you give us some color on what.

That was other market on certain keys are and then of the 270 of Kobe would relate to walk us through some more specifics like just in time impact in some sense of of you know they're quarterly pattern because it would suggest that how it impacts can be bigger in the second order them for.

Yeah kind of let me get started on that how like Jim pickup what I don't talk about.

So the the 270 is that that from a bottoms up we can tie directly to covert 19, So 36 Tenncare's act slow down on dim sum.

When we touch guidance, we sit back and go Okay. What are the unknown unknowns and although it hasn't happened yet we think some of the procurements are going to slow down.

Oh, and there's just going to be a little bit more drag on the business writ large and when we touch guidance. We felt it was prudent to put another 100 million of revenue.

Headwind in our guidance and it's it's not specific them I can't go into the additional the 270, we can almost go contract by contract and Jim May touch on the major pieces there. The additional hundred for US is yeah, I actually thought we were going to get an N.D.A. This year and now I don't think we will I think we'll be in.

Continuing resolution so our forecast assume a continue growing federal budget and things operating under normal way.

Now I don't think that's going to happen I think procurements will slow down that things will take longer meetings take an extra week or two there's no travel and we wanted to put in another hundred million of head when to get us to mid point, which was indeed are are 50, 50, hey, I'll a little bit of the quarter.

By quarter, a case you know we don't guide by corridor that being said you know April must be the worst month, given what we all have been through we've already seen Yo stage started to reopen here in Virginia. The Governor is talking about opening next week and <unk>.

<unk>. So we think that that may will be better in June will be even better, but if if you're starting to phase. We've you now know our first poorer there's just no doubt that second quarter is going to be the the quarter. That's the most impacted and then we expect is Jim said in his comments.

To be fully recovered or maybe be better than by fourth quarter. Jimmy went on edge. Yeah. Yeah, just doing a couple more comments on that it Roger characterize it exactly that 100 million is that piece of our revision that does not have.

Any specific contracts tied to it but it is that you know Adam what we <unk> <unk> as you know, we we try to be pretty conservative and how we guide and and it was we we thought the the prudent thing to do you ask for a couple of some color on a couple of of contracts we meant.

<unk> Dim sum. There's also for example, you know we we support the National Science Foundation and the Antarctic.

The Antarctic as the one continent that has no covert 19 today and they want to keep it that way and so they have slowed down the level of activity that we are we're going to have down on the ice for the balance of the year and so that is now there was some some big programs down there that we're gonna.

To manage and so that pleases into 2021 like a lot of these impacts and then you know there's a part of our business a couple of contracts that have a lot of fixed costs and they are also fix unit price.

And that downdraft that is going to be temporary in the second quarter, obviously is going to impact both revenue in margin in q. too that said those customers that that procure those products and services from us have already contacted us about their restart plan.

<unk> and we're working with them closely to begin re ramping back in the second quarter, and we expect that will be in much better shape there on the third.

Very helpful. So you mention protests could you update is the next gen protest and also the U.N.H. defense Hell take away when yeah, Yeah, well did you know right now we're we're in the throes of finishing and have recently finished all the back and forth and <unk>.

Bonds is on the engine protest and Ah right now we continue to expect that that will be concluded in the second quarter and and as we've said before we're we're pretty confident of that outcome and that would result in a booking in q. too.

And did you have an another one in mind, hi, I'm sorry.

The U.N.H. defense Hell <unk> take away when.

Is that the reserve health program <unk>.

Yes, it's or H.R.P., yeah, yeah, we call that already drunk he right well, that's and that's in protest as well so you know and.

Two more months from where we are yeah, and and so that should be <unk> that should also be resolved by the end of the second quarter kind. So we'll have something to to say about that on our next call as well.

Thanks, so much okay.

The next question comes from the line of Edward case with Wells Fargo. Please just use your question.

Hi, good morning, <unk> if I.

I was wondering how much of your your revenue guidance as a function of a request for equitable adjustments. If that's a meaningful factor that you need to to recapture.

Add that this is Jim.

Ah the R.E.A. is right now are in the forecast very conservatively like zero. They you know it's not our habit to to include those in revenue projections, mainly because the timing of resolution of those is pretty difficult with that said we have had.

Had a number of customers I can think of one customer in the health group.

In one kind of a couple of customers in the defense segment that have invited us to prepare a request for equitable adjustment for things like the fee on <unk> stand by Labour pre March 27th, which you know isn't provide.

<unk>.

Specifically in the cares act, but our customers do understand that there is to you know some significant lost profits. So the the the pursuit and successful closure of <unk>. If it happens. This year would result in some upside to the numbers that we have out there.

Right can you also talk a little bit about your clients behaviour on a word activity and whether you're seeing bridges send extensions in the current environment. Thanks add tanks I'll I'll start on that.

<unk> they have awarded pretty much on time.

And almost to our surprise and like the the the human Lander program out of NASA really was right on schedule.

That being sad part of the hundred million that we had an indoor revenue guidance is conservatism on our part that that may not continue as we go throughout throughout the summer and just the R.F.P. process, where maybe we used to do all rules face to face and now we're going to.

I have to do Orals by by video, we just think that's going to take longer but as.

Through today, we have not really seen anything that I would call an appreciable delay and in fact on our L. three Harris deal our Hearts Scott We got early termination.

So the the government is up and operating and things are moving forward.

Thank you.

The next questions for the line of <unk> <unk> pleased to see with your question.

Oh, Oh, Oh, so much good morning.

I was curious on the the airport security acquisition or whatever.

Presentation that you guys did want to deal with.

In a in January and when you look at that now.

She should we still be thinking about the same type of of numbers you know around for 2020 and.

Ears or as a kind of.

We look at things after a after the cost.

Yeah. Thanks for the questions as you when we took a look at this business.

Both before Cove it didn't really very recently in doing our diligence update we <unk>, we saw that the business was.

<unk> up through.

Beginning of <unk>, the business was outperforming our own projections and pipeline and backlog as we recently looked at it still looks good is Roger mentioned, we had an opportunity to touch base with many of their major customers and.

We were pleased that day or continuing with much of their plans and in fact are thinking about how to reconfigure some of the systems that the L. three Harris business has already sold to accommodate the need for more lanes for example, because of the need for slower testing.

As air airline customers go through security. That's just by way of example, now with that Sad <unk>, there will undoubtedly be some slowed down in the revenue and just because of the of the inability in the short run to get some of the work done but.

It hasn't changed our view of what the backlog the order backlog of the business is so and and those those provisions are have been incorporated into our guide for that business for the rest of the year. Yeah. He says I I just want to add if you were going to take a word out of what we have heard.

The word touch less is what we're hearing from customers about the transit of passengers through security checkpoints and.

Every customer we've talked to his said no. We have been doing this in a highly personal higher Lee contacted environment and going forward. We don't want to put for instance in the U.S.R.T.S.A. agents at risk and we don't want to contact the traveling pub.

Click and if you were call your experience back when we all flu you know depending upon what happens you were attached and especially if you've got a Pat down you might be touched three or four times through the checkpoints and that's just going to be unacceptable going forward. So the T.S.A. age is not going to want to hold your driver's license right, they're going to want.

Another way of verifying who you are you're going to put your material in a bin.

Before you put your material in another been you want to know that bin is sanitized right. If you need to be go through a secondary you want to do a secondary in a way where a T.S. agent doesn't actually have to make contact with you at that means C.T. at the checkpoint so a lot of great Apple.

<unk> technology to the checkpoint of the future and again, we're excited about the opportunity to grow the business that we bought.

Yeah.

Huh.

Next question answering the line of she'll it kind of hill with Jeffrey's because she was a question.

Hi, good morning, Margarine jamming. Thank you for the time Badger I wanted to follow up on Bob's question regarding the healthcare opportunity not only on health care about maybe I.T. infrastructure, just Kevin Garnett government employees are also working from home kind of where are we in terms of timing with these opportunities when do they a marriage are we in step one in terms of tracking and.

Saying, maybe it can you talk about that.

Let let me start with the easiest and that which we have already seen a positive impact as as <unk>. As you know, we provide I.T. infrastructure and a digital transformation for a whole host of government customers from you know see announced to the Pentagon we are the telework provide.

Or for a significant part of the government.

In fact, I'll recounted story a agency director.

Elected to work at home.

And that director had never worked at home before and we are the infrastructure for that particular agency and so we facilitated that individuals work at home. We were you configure your laptop we made sure that he had you know enough bandwidth at home, we provided a user support and that has been going on or.

Cross R.I.T. transformation contracts and that's a media you know and it's not really in our guide and we really don't know how it's going to come down to the bottom line, but we're seeing that across the board and even more show in in the health World <unk> Tele Medicine is gonna be.

A big deal and we view that both in the short term and the long term and then I think.

You know Johns question was whether or robs was really focused on you know we used to have a pandemic working group and you know that seem just gone away, we although that's going to come back.

And we have seen a global viral outbreak every seven to 10 years. So we know this is not you know there'll be a <unk> 25, and we expect that the federal government and organizations like NIH N.I.N.I.A.I.D.

Will mobilized to put in a better response Ah Ah capability and I and I think for us that is a significant growth opportunity.

Okay. Thank you and then maybe one follow up on defense asked when we add back that international receive up all margins are still around a lot of 7%. So it implies a bit of a ramp what's going on in terms of profitability in that segment.

Yeah that she'll have the the profitability in the defense group why we did have that unusual I didn't we had to record to if you take a look back in Q. for you might recall that we had a big right up on a couple of programs in in Q. for.

We've you know, we keep thinking of that as being a business that should be running longer term, you know a dish or a little north of eight.

Okay Alright. Thank you very much. Thank you thank Sheila.

Thank you at this time, we've reached the end of a question answer session on him the call back to <unk> closing comments.

Thank you for.

Thank you all for your time. This morning, if you're interested in light us look forward to updating you again soon separate day.

This will conclude taste conference you may just connect your lights. This time. Thank you for your participation.