Q2 2020 Leidos Holdings Inc Earnings Call
Third quarter 2020 earnings call.
At this time, all participants are in listen only mode.
Brief question answer session well following the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
At this time I'll now turn the conference over to Peter barrel.
Investors Relations. Please go ahead.
Thank you, Rob and good morning, everyone.
You're welcome you to our second quarter 2020 earnings Conference call. Joining me today, a Roger Krone, our chairman and CEO, Jim Reagan, our Chief Financial Officer, and other members of the lightest management team.
Today, we will discuss our results for the quarter ending July 3rd 2020.
Roger will lead off the call with notable highlights from the quarter <unk> comments on the market environment and our company strategy.
Jim will follow with a discussion of our financial performance.
Our guidance expectations.
After these remarks from Roger in Jim will open the call for your questions.
Today's discussion contains forward looking statements based on the environment. Other currently see it.
That's how much 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.
I'll discuss GAAP and non-GAAP financial Mather measures.
A reconciliation between the two was included in the press release, we issued this morning and is also available in the presentation slides.
The press release and presentation as well as a supplementary finance financial information file are provided on the Investor Relations section of our web site at IR that Leidos Dot com.
With that I'll turn the call over to Roger Krone.
Thank you Peter and thank you all for joining US this morning for our second quarter 2020 earnings Conference call.
As we continue to navigate through these difficult times as a country and as a global community I hope each of you are well and your families safe.
Why does the second quarter results demonstrate the resiliency of our business model the value of our market diversity and the strength of our team. It's we delivered on commitments to the most challenging quarter I have seen in my career.
We actually did too cute with a strong business capture win rate record setting backlog resilient cash position and improved capital structure.
These factors galvanize, our optimism for the future. Despite the extended effects of the current pandemic.
In the quarter the business delivered revenue of 2.91 billion, reflecting 6.8% growth from the prior year.
Adjusting for acquisition and divestiture activity.
And effectively taking into account a full quarters worth of cobot 19 impacts in specific areas within the business organic revenue contracted by 3% over the same period.
We recorded our non-GAAP diluted earnings per share of the dollar and 55 cents up 34% from the prior year.
In addition, we generated $422 million of cash from operations ending the quarter with a solid cash balance of 588 million.
Net bookings of 4.6 billion yielded a book to Bill of 1.6 for the quarter as well as a 1.6 on a trailing 12 month basis.
These impressive business capture measurements do not yet reflect material contributions from several notable single award I'd cues that were competitively one over the past several months.
Upon receipt those task orders will be captured in our bookings metrics in subsequent quarters.
Adjusted EBITDA margin of 11.8% was greater than the prior year.
The primary factor was the net gain resulting from the Burnett Ics legal settlement for patent infringement, which was largely offset by a full quarter of the anticipated cobot 19 impacts we discussed during last quarter's earnings call.
The impact of Cobot 19 in the second quarter was approximately 222 million in revenue and 78 million in non-GAAP operating income.
Well some of the Q2 impacts will be recovered in the second half of 2020, we expect more at the recovery to push into 2021 as the pace every openings began both later and slower in the second quarter than previously estimated.
Additionally, the security clearance processing timeline for new employees continues to lengthen and some programs such as Navy nexgen remain affected by ongoing protest activity.
In the meantime, due to the critical nature of our work all of our lightest facilities have remained open and each has implemented safe work force plans to protect the health of our returning colleagues.
For our guidelines occupancy remains below 25% at this time well more than half of our employee base continues to productivity productively telework.
Other than a small percentage that remain home any ready state capacity, the remainder of our workforce reports to customer sites or other performance locations.
From a subcontractor and supplier perspective, our business partner network remains resilient and in good health.
We engage and monitor this important ecosystem daily.
Lead times have improved during the course of the quarter in our teammates continue to perform across all of our programs.
Equally important during the second quarter recruiting and talent acquisition remains strong as evidenced by a nearly 8% growth in new hires in compared to Q1.
This metric excludes additions from M&A.
Our ability to attract top talent in this manner is important as we staff up to successfully execute the new programs in our growing backlog, which now stands at a record 30.7 billion.
This core competency will also proved critical as we prepare the business for continued growth given the ongoing hi pays a business capture activities across the diverse markets we serve.
When we compare mid March through June of 2019 versus the same period in 2020, we found that we submitted more proposals during the pandemic within aggregate approximate value of $8 billion.
Now turning to several notable awards.
Why those was awarded the traveler processing and bedding software contract by the U.S. customs and border protection.
Under this new blanket purchase agreement, we will provide a full range of software development lifecycle services to support CBPO mission to safeguard America's borders and enhance the nation's global economic competitiveness. This single award to be P.A. has a one.
Your base period of performance followed by for one year option periods and a total estimated value of 960 million.
The company was also awarded the Enterprise standard architecture. Five also were forward referred to as ease of five task order to provide managed IP services for the Department of Justice Bureau of alcohol tobacco fire arms and you explosives the single award hybrid.
Task order has a 110 months into one year base periods or performance followed by six one year option periods includes a ceiling value not to exceed 850 million if all options are exercised.
Finally, our dynamics subsidiary was awarded a sole source contract for the production in sustaining a foreign radar simulators known as the laboratory intelligence validated emulation or live family of products.
The contract has a total estimated value of 356 million for production and Sustainment for the next 10 years.
On the M&A front, we remain focused on this successful integration of both dynamics and the former L. Three Harris security detection in automation businesses, both are progressing on schedule.
Since the dynamics deal closed in late January our integration has focused on combining our legacy Leidos innovation Center, we call. It a link with our new Huntsville based business. The link has a great track record of executing early stage R&D for DARPA and the.
Airports research lab and through the combination with Dianetics, we see opportunities for rapid prototyping and producing a higher conversion rate of research projects to programs of record.
Other early collaborations led to important wins, such as Nasa's human Landers systems contract under the agencies argument is program.
If down selected the follow on contract to place the first woman on the lunar surface and return of man could exceed 4 billion.
With security detection and automation.
He business systems integration decisions have been made that further our confidence that the annual cost synergies of at least 20 million can be captured by 2022.
Additionally, we are pleased with the expansion of our check point solutions that will promote the safety and health of the traveling public and those entrusted to provide security services.
To that end in the quarter, We received an award at Edinburgh Airport in Scotland to upgrade the airports security tray return systems with anti microbial Trey technology.
Also the business was recently Shortlisted for a five year opportunity at Munich Airport for the manufacturing installation and service or the explosive detection systems for cabin baggage.
This work would represent an important step in our strategy to grow in the airport security solutions market.
Turning now to the macro environment.
Despite a likely continuing resolution in the fall, we expect minimal overall impacts to our business sector as the physical year 2021 budget levels are already said under the bipartisan budget agreement I.
Additionally, DRD has almost 125 billion in obligated balances as of fiscal year 2019.
Therefore, if budget authorities are flat these balances can allow higher rates of outlay to address our customers ongoing critical mission requirements.
Looking through the Leidos lens, we were encouraged by our continued alignment with the Odcs top 10 technology priorities.
Ongoing execution of our long term business strategy further mitigates potential future headwinds for our business as does our portfolio diversity as approximately half of our business is aligned with the federal civil and how customers.
With regard to our health business I'd like to reiterate that yesterday, we announced the appointment of Liz Porter as the New Health Group President.
Liz's held that position in an acting capacity since early March prior to this role she served as the operation manager for the civil groups Federal energy and environmental business.
This is demonstrated leadership experience and program management engineering and business development will continue to position light owes for growth in the expanding health markets.
Before I hand, the call over to Jim.
I wanted to acknowledge the pain over the continued injustice and violence suffered by the African American community.
Over the past few months, we've seen this pain and more tragedy, we all saw the killing of George Floyd in May and the tragedy in June as Ray Shard, Brooks and Atlanta was unnecessarily killed.
I said this to our employees on our website and our social media platforms and I want to say this again to you racism and social injustice have no plays in our society or at Leidos, nor does any form of discrimination.
The quality and justice must be a universal experience and we must take action at Leidos, we're working to find new ways to engage on these critical topics in order for us to move forward together in unity.
To start we're partnering with the equal Justice initiative, who fights against racial and justice and poverty and promotes equal treatment in our criminal justice system for the most vulnerable.
We have made a large donation and supportive they're important work and move by their focus on progress education and equal Justice under law.
Also we are implementing inclusion training across our company and working to launch a light owes diversity and inclusion council and we're hosting listening sessions with management for our employees across the enterprise.
As CEO I strongly embrace this responsibility and I want to share that with you today.
Ill now turn the call over to Jim Reagan, our Chief Financial Officer for more details on our second quarter results and guidance.
Thanks, Roger and thanks to everyone for joining us on the call today.
As expected Q2 has been a challenging quarter. However, our quarterly results reflect our teams agility to respond to the fluid environment.
Let me start by sharing our quarterly results on update on our recent financing activity followed by an update to remaining year guidance, including cobot 19 impacts and assumptions.
Second quarter revenues grew 6.8% over the prior year period and contracted 3% organically.
The increase in topline revenue was driven by the recent acquisition of Dianetics and the L. Three Harris security detection and automation businesses.
These increases were offset by approximately 132 million of cobot 19 related impacts.
In addition expected growth on existing programs was reduced by 91 million due to covert 19.
Without these pandemic driven headwinds our second quarter organic growth would've been about 5% over the prior year period.
Adjusted EBITDA margins of 11.8% increased 180 basis points from the prior year quarter driven by the following items.
The first was the 81 million dollar net gain related to the Verneta legal matter.
The second was volume reductions on existing and new programs directly attributable to the cobot 919 pandemic of approximately 78 million.
And after adjusting for these discrete items and the related revenue impact of 222 million adjusted EBITDA margins would have been 10.9%, reflecting strong program performance and reduced indirect costs for our business.
Non-GAAP diluted EPS for the quarter increased 39 cents over the prior year to a dollar and 55 cents driven by increased volume strong program performance and lower share count.
The net gain from the Verneta Ics legal matter and cobot 19 impacts largely offset one another.
Operating cash flows of 422 million reflects a one time Burnett ex litigation payment of 85 million the incremental accounts receivable monetization of 74 million and lower tax payments.
As mentioned during our last earnings call, we remain committed to our long term balanced capital deployment strategy.
In the quarter, we completed two actions toward our path to an adjusted net leverage target of 3.0 acts.
At the end of the quarter the metrics the metrics stood at 3.4.
First we refinanced 1.7 billion seven $5 billion of loans associated with the acquisition of Dianetics Andrey L. Three Harris security detection and automation businesses.
The deal marked our strong return to the investment grade bond market as evidenced by an over subscription of approximately twelvex, which facilitated lower rates compared to the initial price indications and simplified our debt covenant structure.
The transaction extended our debt maturities, resulting in three tranches of senior unsecured notes, including a three year, a five year and a 10 year with a blended coupon rate of 3.75%.
Second we used the kinetics proceeds of 81 million coupled with strong cash generation from operations during the quarter to pay down approximately 226 million of our debt.
We had another solid quarter in business development, resulting in bookings of over 4.6 billion, bringing our book to bill for the quarter to 1.6 acts and overall backlog position of $30.7 billion.
Large new business wins in the defense solutions segment, and the human land or system program contributed to the record backlog number.
Let me now take a moment to recognize the outstanding work by our business development and capture teams in submitting a world class winning proposal for the 7.7 billion Navy Nexgen competitive procurement.
As you are aware the award was protested and in June the U.S. government Accountability office decisively denied two separate protests, including one from the incumbent.
These decisions reaffirmed the outstanding rating assigned to lie those by the customer across the most critical technical and management management evaluation factors and also recognized our substantially lower price.
We remain confident that we will prevail in the U.S. core to federal claims and we look forward to ramping up the important work for our customer later this year.
Until then the award will be excluded from our reported backlog.
I will speak more to the ongoing protest later when we discuss our updated F. why 20 guidance.
Before turning to our segment results I'd like to provide an update on our hiring given its importance to the growth of the company.
I'm pleased to report that we welcomed approximately 1000 employees from the security detection and automation businesses that we just acquired.
And we also onboarded nearly 2000 additional new hires in the quarter.
Second quarter average weekly hiring has exceeded pre pandemic levels, demonstrating our ability to attract top talent during a tight labor market.
The year to date annualized voluntary attrition rate has declined by approximately 230 basis points compared to the prior year.
And we continue to invest in our people to driver attention and attract new employees.
Now for an overview of our segment results.
Defense solutions revenue grew 12.6% on a year over year basis.
The primary driver for the growth was the acquisition of dynamics from an organic perspective, the segment contracted 0.6% due to 18 million of contract volume reductions directly related to covert 19.
In addition expected on contract growth was reduced by about 19 million due to covert 19.
Non-GAAP operating margins of 8.1% declined 20 basis points from the prior year quarter, primarily attributable to cobot 19 impacts, which were prob, partially offset by program wins.
Defense solutions booked over a 3.5 billion of net awards, including two large new business wins with our intelligence customers, resulting in a book to Bill of 2.0 acts in the quarter and one point fivex on a trailing 12 month basis.
And our civil segment revenue grew 13.6% from the prior year quarter.
This growth was primarily driven by the $80 million contribution from the acquisition of the L. Three Harris security detection and automation businesses and increased contribution from new programs, partially offset by 18 million of reduced volumes on programs impacted by covert 19.
Furthermore, the pandemic caused a reduction of 34 million in expected growth on existing contracts and delays to the ramp up of new programs.
On an organic basis, the segment grew 1.6% from the prior year.
Non-GAAP operating margins in the civil segment were strong at 12.9%, reflecting a 180 basis point increase over the prior year period.
This increase was driven by the acquisition of the SDMA business.
Program write ups and performance on new programs.
Civil generated nearly 1 billion in net bookings in the quarter, reflecting the successful resolution of a protest on a new business Award and the Isa Five Recompete Award mentioned earlier.
The result was a book to Bill of 1.3 acts for the quarter and two point onex on a trailing 12 month basis.
And finally, turning to our health segment.
Revenues were uncharacteristically low declining 20.4% from the prior year period due to 96 million of Cobot 19 impacts and the sale of the health staff augmentation business in the third quarter 2019.
In addition expected program growth reflected in our previous guidance was lower by 38 million due to covert 19.
These negative impacts were partially offset by contributions from new programs and the acquisition of IMAX and the third quarter of 2019.
After adjusting for the cobot 19 impacts and the acquisition and divestiture activity revenues would have increased 11% year over year.
Non-GAAP operating margins for the health segment were 5.3% for the quarter.
This lower than normal margin was the result of cobot 19, driven volume reductions on certain managed service contracts with fixed cost infrastructures.
Our health segment saw approximately 150 million of bookings in the quarter driving a book to Bill of Zero point Fourx with a trailing 12 month book to Bill a 0.9 acts.
Moving now to the remainder of the year.
We are updating our guidance across all metrics to account for our second quarter results additional cobot 19 impacts and increased visibility for the second half of the year.
We are adjusting our revenue guidance to a range of 12.2 to 12.6 billion, which is a reduction of 300 million or 2.4% from the prior range midpoint and represents at 12% increase over 2019 results.
This 300 million dollar reduction includes additional covered 19 impacts which reflect the slower than anticipated customer reopenings.
The delayed ramp up of the Navy next Gen contract and various other program delays and volume changes.
As the engine protest has moved from the Geo where it was fully decided to the core to federal claims we remain confident that this protest will be resolved in our favor. However, this does delay the full transition until late in the fourth quarter continuing into 2021.
Note that in our previous guidance, we expected our cobot impacted programs to begin to ramp up back to normalized run rates during the second quarter.
However, with slower customer openings, we now expect programs to return to their normalized run rates in the fourth quarter and then continue unimpacted into 2021.
We anticipate that the majority of the 2020 impacts will be recovered in 2021, reinforcing our confidence in the ability to grow more than 10% organically next year with margins at or above 10, our 10% adjusted EBITDA margin target.
In terms of margins, we expect adjusted EBITDA margins of 10.0% to 10.2% for the year.
This 20% excuse me this 20 basis point increase at the midpoint.
From the prior range reflects the net gain from the Verneta litigation and the reduced indirect rates, partially offset by the impact of lower margins within the year in our health segment.
As a result of these new ranges for revenue and margins, we're updating our non-GAAP diluted EPS guidance range to $5 in 25 cents to 555.
This increase of 25 cents at the midpoint from the prior guide reflects the net gain received from the Verneta litigation, a slightly lower tax rate and reduced interest expense for the year offset by the cobot 19 impacts discussed earlier.
Finally, we expect cash from operations to be at least 1.2 billion for the year up from the prior guide of 1.0 billion, reflecting the proceeds from the frenetic litigation and an anticipated 100 million dollar increase in the net receipts from the accounts receivable monetization facility.
A two additional items to note to help you with modeling.
We expect lower net interest expense for the full year of 176 million a decrease that reflects lower interest rates to our debt restructuring and a slightly lower non-GAAP tax rate in the range of 21% to 22%.
With all that I'll turn it over to Rob So we can take some questions.
Thank you.
We'll 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 don't indicate your line is and the question Q.
Hey press star to if you'd like to move your question from the Q.
Participants are using speaker equipment.
We ask you please pick up your handset before pressing the star keys.
Thank you and our first question comes from the line of Robert Spingarn with Credit Suisse.
Hi, good morning.
Hi, good morning, Rob.
Just on the back of what Jim just went through and Roger you talked about this just want to be clear on.
The pressure, particularly in the health segment.
Are you, saying thats, mostly timing.
Driven in that you're going to recover a lot of that.
Yes next year or.
Yeah.
As it has to do with.
Some of the medical exam work that we do think about as fixed infrastructure and because of Cove. It a lot of facilities are shut down and the we've moved some of that to tele health and some of that through review of existing medical records, but the vast majority of the work that we do.
Requires a medical exams.
And those are metalworking exams that have to be done whether it be workman's comp or a disability benefit and those have rolled if you will into backlog. So you think of it is a simple inventory.
Of those need to get done or they're not getting done.
And the individuals who need that benefit need a medical exam and so if they didnt get it in second quarter then they're in the backlog now for our third quarter in fourth quarter, but it's just going to take time to work through the backlog. So it is literally a timing and what we have seen in the past Rob when we have seen the backlog.
We will surge right and conduct more exams than normal to catch up. So this is not a permanent timing difference. It literally is just a delay and then we'll surge and then sometime probably late and 21, we'll come back to norm.
Ice and snow, taking get the exam elsewhere or that it's somehow loss share or anything like that it's no. They come back to you yeah and all of the.
The offers are these exams, whether it be workman's comp or.
Disability are in the same boat, we've all been shut down and the backlog has unfortunately grown and.
We're now 85% opens something like that.
As of April earlier, this week and so it's just going to take time now to work through the backlog and we're committed to go do that.
Okay and then the other thing I wanted to talk about against very interesting, but your role on Sky Board.
As the system design agent and wanted to see if you could talk about the scope.
Perhaps of that contract and if the work scope there is kind of a one and done or if youve any kind of recurring revenue stream from Skyworks long term.
Well where the.
Actually the systems engineering.
Contractor for the customer and as as you know I think you may have written is that there are a.
A handful of other companies that are working on the concept in the vehicle.
And our job on that program is to assist the customer and doing technical assessments and systems engineering at the concept level.
And it's it's a nice program for US. We're obviously very very pleased with it. It is it is not our largest program and probably won't grow to be because of our of systems engineering role, we stand more along with the customer in the user than we do with occur.
Companies, who may be designing and building the vehicle.
But that makes you somewhat agnostic on how this plays out your raw Solaire, yes, absolutely.
And does this help you with autonomy efforts down the line well I think it helps us in many areas, where the autonomy with systems engineering.
It advances if you will our past performance and and our are.
Qualifications in the area.
And when we assessed it we viewed we didn't really have an airborne offering and a better position for us was to be in this systems engineering role with the customer. So it's a great qualification for us.
Great. Thank you very much.
Good morning.
The next question is from the line of Sheila Kahyaoglu with Jefferies.
Hi, Good morning, Roger Gen Peter.
Hi, Good morning, I guess related to Bob's question to degree there's an element of light us.
With that thesis changing as the organic leader undergrad space given your recent wins like and Jan However, obviously during covered.
I thought you gave a great explanation and may about the impacts of coveted whether it was dems dominant antartica.
Clearly that the scope of the covet impact extended beyond those program. So I guess why do you think those businesses were impacted and you touched upon it a little bit just now but.
And how do you think that normalizes and how do we think about I guess my follow on is how do we think about 2021, because you stay in the slides you normalize in Q4 or whether its revenue growth and margin Max Yes August starring outlet ill, let Jim finish.
If I were the defense Health program, the electronic records program for DHL say.
Is.
Only impacted to a very very slight in fact, we would we would reiterate that the completion schedule is still on track and 23 timeframe. So most of our.
Digital transformation work in the healthcare business is pretty closed on schedule. So we haven't seen huge numbers there really the impact this quarter has been in the exam business that we have and it really of cautious uptake of.
A couple of months, where we just couldn't get the exams is done and maybe I'll, let Jim expand on on that a little bit sort of our fixed cost variable cost view of of our examination business issue I think Rogers said, it well that but you had two to two just emphasize the point on what's changed from.
When we talked about the expected impacts a quarter ago.
The real change has been that they the impact of the pandemic in a number of geographies.
Has been more prolonged in perhaps more severe than we had visibility to 90 days ago and that has caused some of our customer sites and some of our examination sites to be close longer than expected and they returned to work in some of our customer.
Decides whether it's you know our intelligence customers within the defense solutions segment or the the places where we serve patients for these medical exams services all of those of.
Had a longer and more prolonged return to opening than we expected just three months ago, but Sheila your comment about 21, I think was right on.
We expect to come back to have normative level in the fourth quarter.
And then therefore.
Exceed that level in the exam business in 2021 so.
Obviously optimistic about what 21 will look like.
Great. Thank you. Thank you.
The next question comes from the line of Cai von Rumohr with Cowen.
Yes could you please give us.
Our inside and recovery shares.
For example areas in which we expect recovery is medical exams and do you have any.
It's a bookings that.
But.
Yeah, Cai I'll I'll start and it's Roger has more to say he'll he'll pile on.
The the cares act impact is is actually helping us keep a number of employees in the defense solutions segment, primarily in the intelligence agency customer sat in are ready state and so we're able to recover full cost but not fee.
For those people and it's it's no more than 5% of our employee base that cares Act does not cover.
The recovery of ready state employees or facilities for the contracts that we have in our health solutions business for two reasons one.
A number a suit a certain amount of that revenue is from commercial customers. So think about insurance companies.
Uhhuh for whom we're doing.
Disability exams, and so forth, but also our government customers. Because these are done on a fixed unit price basis, where we do have some significant fixed infrastructure think about you know lease costs and and the the costs of staff to process. These exams those costs are not normally.
Covered by the the provisions if he cares act.
So that's the primary impact that you are hearing us talk about in the health business.
Next year.
Our next question is from the line of Seth Sigman with JP Morgan Chase.
Oh.
Thanks very much.
Im just curious with regard to the.
300 of.
Incremental impact.
Should we think of that as being.
The vast majority of that in the health business and I guess on the in the defense side kind of thought of the mean challenge for covert 19 for federal service providers as being facilities that.
Our and open and so how should we think about that.
Incremental impact the divided between those two.
Yes, those two areas.
You said think about roughly half of the 300 is being incremental impact from covered 19 with.
A little under half of it being the delay of the engine ramp up.
Because of the ongoing protest activity there and then the balance of it would be.
Coverage 19 impacts in other parts of the business such as the civil business and and other parts of the defense solutions segment.
Okay. It sounds like then you don't really see that on the intelligence side and.
The impact.
Pandemic onset care facilities. It sounds like that you you don't see very much incremental impact there and not not that much incremental the bulk of the incremental impact is being seen the largest single piece of it is being seen in the health business.
Okay, great. Thanks, Thanks, very much okay.
Our next questions from the line of Jon Raviv with Citigroup.
Good morning, John John.
Hi, Thank you very much for that sorry about that just Jim some of those cash moving pieces heading from this year into next year.
I think you got some sort of almost two one time transient items, helping you get to the 1.2 or greater this year. He just help us think about what the moving pieces are going forward. Some of those tax items, perhaps that go back how sustainable that they are factoring is.
Et cetera et cetera. Thank you.
Sure.
It will portfolio, we expect to leave the the a our monetization program in place and and that can there is some more possibility there to the extent that we need additional funding from it.
It's a very low cost.
Mechanism for is to use and it it's it's ready for us anytime.
The other moving parts in getting us from the $1 billion to the 1.2 billion number.
On the change in guidance there is as we mentioned earlier that kinetics impact that's cash in the bank today.
And then they're also some positive impacts.
From the carriers Act on how we pay taxes. So we've been able to defer the payment of Boes income and payroll taxes.
Yeah, primarily our payroll taxes into next year, the the about a portion of the Doe the deferral of our income taxes is simply moving it into Q3 Q4, so that think of the tax benefits into next year is being over $100 million and then the balance.
Of the changes are primarily driven by koby 19 impacts being an offset to the tailwinds that we're seeing on cash flow.
Understood. So should we be prepared for operating cash flow to full year on year in 2021, or if the extent of cares act items are offset by covered we could actually grow off at 1.21, well some of that.
Some of the tax benefits will be offset next year and into 2022.
But the only other headwinds that I think we can anticipate from a cash flow perspective is that we expect a business to grow nicely into 2021.
In the past, we've said high single digits, but now that we've got some significant backlog from the health business in other parts of.
That defense solutions business for work, that's going to carry into 2021, that's that's how we get to some confidence around 10% or better in terms of our topline next year.
Thank you. Thank you.
Your next question comes from the line of Peter Arment with Baird.
Yes, good morning, Roger Jim Peter.
Good morning, Peter and Roger just maybe just without getting into maybe specific dollar numbers, but when we think about the security protection in automation kind of revenue profile now that you've kind of been deeper into this business in the impacts.
Seem at conversations with customers how do we think about this business as we go into 21 is in a business that's growing or maybe just give us some color around.
Thanks.
Right.
I'd love to.
By way they are ahead of our plan.
So we had an internal plan that we put together for the combined business, which included the tewksbury business and the.
The business in the UK that makes the tray return systems and.
They had a.
Quarter that exceeded our expectations.
And we expect that to continue and I know in the for and last call. You are we talked about what's going on at airports. In his is gonna have sort of acquiring effect on that business and our speculation was at airports are going to use this period of time to do capital improvements and we.
Certainly seen that we've also seen.
Airports wanting to add a social distancing and health and safety to.
The screening in the checkpoint.
If you have to stand six feet apart you got a redesigned the checkpoint.
Which means you might need more lanes, you're certainly going to need places for people to stand the antimicrobial trays, putting ultraviolet light in the return pantry entrees.
Doing touchless.
Screening and looking at People's ideas that Theres, just a lot of opportunity to grow the business beyond what we had anticipated when we build our original business case last year to acquire the business and then that the team there led by Maria heading has been doing a great job of reaching out.
Globally to customers and we are in 150 or more countries now.
And.
Earlier across the board, we've seen of a lot of interest in.
Capital improvements, we would tell you the rebound is probably started.
Little stronger.
Outside the United States, we're still sort of dealing with this kind of resurgence this summer but.
In many of our foreign markets they have hedged stricter lockdown on.
The pandemic and therefore their numbers are smaller and they are implementing.
Biometric.
Concepts at at the airport. So we're very very pleased in the integrations going well and.
It is like I said ahead of our business case.
Appreciate the color. Thanks.
Our next questions from the line of Edward Caso with Wells Fargo.
Hi, good morning.
Can you talk a little bit about your recompete exposure for the rest of this year as well as 2021. Please thanks.
Yes, Thanks, Ed they're kind of three that we talk about we've got our our what we call our NASA NIS program, which has been.
Submitted.
And then we've got.
We've got two more that have not been submitted we've got one ad.
NJ, we call our our user facing and data services contract, it's probably the largest touch up for Recompete, It's about 4.4 billion.
We should submit that towards the end of this summer.
And then we have the ITC services work that we do for the Army Corps, we referred to as Ace Ita.
That's our proposal that ought to submit also at the end of this summer and it's going to be at $1 billion dollars plus but the only one that's actually been submitted is our FAA.
No risk, which is the national Aerospace systems integration support contract, where we are the income, but we're actually the incumbent on all three of those.
And it's 2021, a normal 20, 25% year or so anything unusual there.
Yes, very normal Ed no.
Theres not a hanford out there.
Okay, and you mentioned you are seeing issues and clearances.
Oh really been hearing that from off some of your competitors this or.
Anything unique about the mix of your business that that that's challenging you more.
Well I think what maybe unique first by way, it's primarily in our Intel business. So it's the very high end clearances often requiring.
Polygraph I think the background investigations seem to be going okay. I think the problem is.
I don't want and too much detail, but if you've ever been throw polygraph you know it is a very.
Covanta unfriendly process.
And how thats conducted in the throughput that the agencies have on getting polygraphs done.
Has slowed down so which is uniquely in our Intel business I think why it affects us maybe more than others is because of the wind and the growth that we've had so we were not trying to maintain staff, we're actually trying to significantly increase the staff in our Intel business because of our wins.
And that means we have to get new people through the clearance process and able to support our growth and not reflecting on some of the others that have reported.
Our clearance process is not about our current workforce or really predominantly and what we call our collateral clearance, which you might see our defense group like a secret or a top secret. It really is in that that high end group.
Great. Thank you.
Our next question comes from Atlanta, Joseph Denardi with Stifel.
Hi, good morning.
Hey, Joe Good morning.
Hey, guys.
Jim just in terms of 2021 is that thinking maybe that half of the growth is engine that happens all else just just in the context of you're sitting on a trailing 12 month book to goal of 1.6 stands X and Jan will speak to really strong maybe double digit growth by itself.
So why can't growth the better than Ben 10% or do you see kind of a multiyear period beyond 2021 with with really strong growth given given the backlog and can you just update us on the pipeline.
Of that you're expecting thank you.
Sure well first of all Joe Thanks for the question. The the speaking first of the pipeline the pipeline of.
New business opportunities continues to grow and interestingly it is growing with.
A lot of programs, where the first while they're there we've got plenty of billion dollar size programs in the pipeline, but theres also continuing growth in the you know the the size programs that are in the hundreds of millions of dollars. So.
It it gives us greater diversity and greater opportunity to your question about where the is half of the growth coming from engine a answers really know because the engine program will take some time during 2021 to ramp up and so that the the growth of the business.
[music].
Your your point is well taken that it could be better than 10%.
But it's our habit to be pretty careful and conservative in putting out those kind of targets. This early in the cycle.
Last point that I would make is that we as as we get to the backend of Covidien. Our customers are more comfortable with the protocols that we're putting in place to protect.
Patient than people undergoing these exams, we expect that we'll be back on the path to the health groups prior stature as being the that part of our business that has the highest margins and the highest growth rates and and while the defense solutions segments going to enjoy nice growth from the engine program.
We were looking forward to seeing the health group get back to a healthy margins in healthy growth rates in 2021.
Yes, Thats helpful. And then just along those lines in terms of the expectation that business kind of gets back to normal by Fourq do you have visibility into that or is that more kind of hopeful in nature of this finer said things are fluid are you having customer conversations that give you confidence around that are you able to change certain processes that well.
Since you're.
Exposure to what you can facing the past few months thanks for that.
It's more the ladder.
Where we already sit today in a better position, where both the commercial and the government customers have allowed us to reopen clinics, we have put a social distancing noncontact in place.
People are coming back to the clinics were seeing the volume increasing.
It just didn't increase in the second quarter and big because we are now using pp, we're having people wait in the parking lot before they come in for it exam.
We're not at the same number.
Number of exams per day, as we were pre covert and so that's going to take another quarter or show to ramp back to where our capacity is.
Where it where it was pre cobot on a clinic by clinic basis.
Sure I as I said I think we're about 85% on the clinics that are open we expected to be fully open.
In this quarter and then we've got to get our capacity up and you would only works so much overtime to get the number of exams done per day, and we're all learning how to be more efficient in this cobot 919 environment and and clearly post vaccine will be either back or better than we were.
Were pre because we're learning how to be more efficient and how to do some exams by Tele health, which we was not a big part of our business prior and that allows us to do.
They have more capacity through a given site so.
And the customers across the board corporations government agencies are all.
Very eager to work with us because the backlog is not good it's not good for them.
We want to go and get these exams done. So we can get the claims adjudicated and we can get reimbursements to the individuals at one one other point.
Aside from the health business in the Defense solutions segment in particular, our intelligence agency customers, they've seen very real mission impacts because of the need to partially closed their work locations and they're eager to work with us to get people back in.
Those work locations and would that is a process. That's currently underway last point that I would make in one of the things that we've learned from.
How we've had to operate we've we've reduced our cost structure and you know when when you take.
The Verneta settlement and when you take out the cobot 19 impacts to the business that are art arguably temporary.
The business had a 10.9% EBITDA margin in the quarter and while.
EBITDA margins go up and down from quarter to quarter, we do feel confident that on an ongoing basis. What this has done is weve leaned out the business, even further than we haven't and with which gives us strong visibility into good margins into 2021 and beyond.
Very helpful. Thank you. Thank you Joe.
Our next question is coming from the line of Matt acres with Barclays.
Hey, good morning, guys. Thanks for the question Hi, Good morning, I Wonder if you could comment.
Good morning, I Wonder if you can comment just on what you're seeing kind of early Q3 is typically the big order quarter for the year I mean at any size that this will be.
A slower than prior years are things sort of.
For the mass are holding up.
Okay.
There's really no reason why it should be different than any other prior year I would simply point out.
Big frankly, because of our success and the wins. We are also very successful and attracting protests and adjudication of the quarter Federal claims and that has somewhat spread our three Q.
We've added a couple programs.
That have been in protest they come out of protesting hit corrective action, we have to resubmit I think it where.
We might have seen a lot more concentration exactly in Threeq you, we've seen some of that spread a bit we think a nexgen probably oral arguments are in October that won't get resolved probably for a month. After that we have a program we call the.
Reserve Health readiness program, which is a large program to provide services too.
The military reserve and that is in corrective actions. So we have to go through a re summit, which we have done and then they have to adjudicate and make an award again that could be third quarter, but.
It's always hard to predict.
What happens in the protest world, but but there is nothing unusual about this year that says third quarter should be any different than.
Prior quarters.
Got it. Thanks, that's helpful and I guess, one more just on tax starwood.
I guess R&D going from expensing to amortizing over multiple years I think its own 22.
Can you kind of what the impact of that can be on lighter.
Yes.
We're actually looking at ways that even with the change in the law.
We're going to be able to recognize more of the work we do as eligible for the R&D tax credit I don't have a precise number for you but.
We're not viewing it is something thats going to have a big impact or material impact on our effective tax rate.
Yeah. This year, we've done a really good job of identifying things that are eligible for not just aren't the R&D tax credit, but but in even more importantly in connection with the acquisitions that we've done.
Being able to take part of the.
Ascribe value of the business and make them tangible personal property that is eligible under the accelerated depreciation rules.
Of that came with.
The recent tax Reform Act so.
We think that there's some opportunity there to improve the cash tax position not just from.
How we can optimize R&D, but even more importantly.
Get more benefit from the.
Acquired companies.
Got it. Thank you. Thank you.
Thank you we've reached the end of the question answer session and I'll now turn the call back to Peterborough for closing remarks.
Thank you Rob. Thank you all for your time. This morning, if your interest in Leidos, we look forward to updating you again soon have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.