Q3 2020 Leidos Holdings Inc Earnings Call
Greetings and welcome to the lightest third quarter 2020 earnings call.
At this time all participants are in Nielsen only mode have.
Maybe a question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I'll turn the floor over to Peterborough with Investor Relations. Please go ahead.
Great. Thank you, Rob and good morning, everyone.
Welcome you to our third quarter 2020 earnings conference call.
Joining me today are Roger Krone, our chairman and CEO, Jim Reagan, our Chief Financial Officer, and other members of the Leidos management team.
Today, we will discuss our results for the quarter ending October 2nd 2020.
Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment, our company's strategy.
Jim will follow with a discussion of our financial performance and our guidance expectations. After.
After these remarks from Roger and Jim We'll open the call for your questions.
Today's discussion contains forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Finally during the call, we'll discuss GAAP and non-GAAP financial measures.
Reconciliation between the two was included in the press release that we issued this morning and is also available in the presentation slides.
The press release and presentation as well as a supplementary financial information file I provided on the Investor Relations section of our website at <unk> Dot lightest dotcom.
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 third quarter 2020 earnings Conference call.
As we near the end of a challenging year from both an individual and community perspective, I sincerely hope that each of you and your loved ones remain safe and healthy.
Why don't just third quarter results.
Collect all hard work and dedication of our employees and close collaboration with our customers as we provided continuity of operations.
While accelerating our pandemic response plans.
This is evidenced by record revenue solid margins record backlog and record operational cash generation.
While the challenges still remain we're pleased with the growth in margin trajectory.
As we entered the fourth quarter and beyond.
In the quarter the business delivered revenue of $3.24 billion, a new high watermark for the Corporation.
Flexing, 14.4% growth from the prior year.
Adjusting for acquisitions and divestiture activity.
Organic revenue grew by almost 2% demonstrating the declining affects of Kobe 19, as our teams diligently executed their recovery plans.
We recorded non-GAAP fully diluted earnings per share of $1.47 up 8% from the prior year.
In addition, the business generated a record $592 million of cash from operations.
Net bookings of $4.3 billion in the quarter yielded a book to Bill of 1.3 times as well as 1.5 times on a trailing 12 month basis. Despite several bid protest.
At the end of the quarter.
Adjusted EBITDA margins of 10.7% reflects strong program execution across all business segments, including an accelerated reopening of our medical exam business as we designed to work flow protocols in safety measures that met customer requirements.
Well the impact of maintaining our fixed cost exam infrastructure, which deeply felt in Q2.
That investment was the right decision as the market demand for our services rebounded well in the third quarter as demonstrated by our results.
For the quarter COVID-19 impacts to the overall business were approximately 109 million in revenue and 23 million in operating income.
Representing a significant decline from the prior quarters impact of 223 million.
And 78 million respectively.
Furthermore, third quarter impacts were partially offset by program performance and on contract growth.
Cross our highly diversified portfolio.
We continue to expect recovery of greater than 70% of COVID-19 impacts in future quarters.
Now turning to some notable awards that contributed to our ninth consecutive quarter of record backlog.
In the defense solutions segment lighter, which was awarded a 306 million follow on contract by the Army contracting command to provide the full spectrum of turnkey ground and flight operations for the Saturn arch aircraft in Okon is contingency environments.
In the civil segment, we want a 292 million prime contract by the Federal Aviation administration to design and develop a system to provide real time access to essential whether aeronautical and national Aerospace system NASS information through a common.
Nash wide enterprise information display system.
Additionally, within the intelligence community. The company was awarded contracts collectively valued at 445 million, which encompass mission critical services that help to counter global threats and strengthen national security.
Our 31.7 billion backlog about.
About two and a half times, our third quarter annualized revenue run rate.
Coupled with our strong new business pipeline provides a strong foundation for accelerated growth into next year and beyond.
Furthermore, our backlog does not reflect recent awards with the Defense Health Agency and the Army Special operations command due to protest activity at the close of the quarter.
Similarly, the $8 billion Navy Nexgen protest remains in the U.S. court of federal claims with the oral arguments now scheduled for November 13th.
We still anticipate a favorable outcome shortly thereafter.
Now turning to the macro environment.
The U.S. government is currently operating under a continuing resolution through December 11th which includes an extension of section 36 10 of the cares Act.
It is likely that the CR is extended into the next calendar year, we do not anticipate any material impacts to our 2020 year end results. Furthermore, we remain engaged with our industry partners.
To help ensure that extension of the CR also includes the existing section 36 10 language.
Looking to 2021 and beyond we continue to have conviction that our positioning in infrastructure.
Space exploration and health care in the federal civil markets and in unmanned systems, Hypersonics and digital modernization and the defense and Intel markets closely aligns with our customers enduring needs, which are supported by both sides of the aisle within.
The federal government.
Next I want to update you on the Leidos relief Foundation, which has been a tremendous resource for so many members of our lightest family who have been affected by the pandemic.
The foundation is generously funded by hundreds of fellow employees as well as members of the Leidos Executive leadership team and board of directors.
To date funds from that foundation have already been directed to assist a 175 employees or employee families who have experienced a financial hardship or lost a loved one during these challenging times.
The health and well being of our employees is our top priority and I'm proud to be part of the team that continually supports one another.
I want to mention one other important development to you today.
On October Twentyth, we announced the departure of a valued colleague from our board of directors.
Lawrence Sea Nussdorf.
Larry step down from the company's board of directors for medical reasons effective October 15th.
Larry has dedicated more than a decade of service and leadership to our company seeing us through transformational change growth in helping create enviable shareholder value.
He has accelerated our strategies and added value at every turn.
Recognizing that Larry is irreplaceable, our board decided to eliminate the vacancy caused by his departure and we will carry on with 12 directors.
To say that we will Miss Larry is an understatement as his expertise in all aspects of financial investment and legal activities gave us a sounding board we could always rely on I am personally thankful for his friendship and counsel at times. He is challenged me and I.
Have grown because of it.
I am incredibly appreciative of his mentorship and friendship.
Didnt want to close today without acknowledging his many contributions we.
We wish Larry and his family well as he focuses on his recovery.
I will now turn the call over to Jim Reagan, our Chief Financial Officer for more details on our third quarter results and guidance.
Thanks, Roger and thanks to everyone for joining us on the call today in the interest of getting to your questions I'll focus my comments on our solid third quarter results and full year guidance.
Third quarter revenue was strong growing 14% over the prior year period, including 1.7% organically.
In addition to contributions from recent acquisitions, our growth was primarily fueled by recent program wins and on contract gross plus our ability to accelerate the reopening of medical exam clinics, which is a part of our business with high operating leverage.
Today, we are performing in volumes that exceed pre pandemic levels to address the backlog of medical exams that had built up during the second quarter.
These increases were partially offset by a $109 million of COVID-19 impacts comprised of approximately $40 million of year over year impact plus $69 million of anticipated growth that we would have achieved on existing and new programs.
Adjusting for the impact of COVID-19 on the quarter organic revenue growth would have been roughly 5.5%.
Adjusted EBITDA margins were also strong at 10.7% consistent with the prior year period in spite of a 23 million dollar COVID-19 headwind to expected growth.
This compares well with our prior year adjusted EBITDA margin of 10.7%, which had been assisted by the $54 million Greek Arbitration Award.
Our robust margins this quarter were driven by exceptional program execution and indirect cost management across all of our segments.
Non-GAAP diluted EPS of $1.47 exceeded our expectations going 11 cents over the prior year period.
Our strong program performance and increased volume on existing and new programs, partially offset by higher interest expense drove the 8% growth year over year.
Record high operating cash flows of 592 million for the quarter were driven by strong operational performance across the enterprise higher customer advance payments and favorable timing of vendor disbursements.
The A., our monetization facility contributed only $7 million during the quarter.
Keeping with our disciplined capital deployment strategy and our commitment to de lever. This quarter, we used cash on hand to pay down 477 million of debt retiring a $450 million senior unsecured note three months early.
Additionally in October.
We completed a 1 billion dollar bond deal that benefited us in three ways.
First enabled by our investment grade credit rating, we were able to capitalize on favorable market conditions by securing lot lower long term interest rates.
Second we replaced certain debt instruments with ones with extended maturities and lastly, the deal provided our balance sheet with greater near term liquidity that allows us to take advantage of smaller tuck in acquisition opportunities where speed of execution provides us with an advantage.
As of the ended the quarter, our adjusted net leverage was slightly above 3.0.
Which was a goal we had previously set for early 2021. After we completed the two acquisitions earlier this year having.
Having reached our target leverage we remain committed to our long term balanced capital deployment strategy, which consists of being appropriately levered and maintaining our investment grade rating rich.
Returning a quarterly dividend to our shareholders and reinvesting for growth both organically and Inorganically.
And returning excess cash to shareholders in a tax efficient manner.
Bookings of 4.3 billion were strong across all segments and resulted in a 1.3 time book.
Dated book to Bill with record backlog ending the quarter at $31.7 billion.
This record backlog reflects a 33% increase over the prior year period.
It's also worth noting.
Excluded from our book to Bill and our backlog is the impact of $9 billion of contract awards that are currently under protest.
Now for an overview of our segment results.
Defense solutions revenue increased 22% over the prior year and 3.5% organically dry.
Driving this growth was the dianetics acquisition and the strong execution of new programs, partially offset by co benign impacts of 26 million from reduced volumes on legacy programs and 14 million from expected growth.
Non-GAAP operating margins in the defense solutions segment of 8.8% grew 110 basis points from the prior year quarter.
Contributing to the increase was the dynamics acquisition, new program wins and reduced indirect spending partially offset by impacts due to go be 19, including the effects of maintaining mission essential personnel in a ready state for key customers.
Defense solutions booked over 1.8 billion in net awards, resulting in a book to Bill of 0.9 ex for the quarter and 1.2 on a trailing 12 month basis.
[music].
In our civil segment revenue grew 5.2% over the prior year period and contracted 4.9% organically.
The topline growth was driven by the acquisition of the security detection and automation businesses.
This increase was offset by COVID-19 impacts consisting of 14 million from reduced program volumes and 38 million from expected growth on existing and new programs.
Civil non-GAAP operating margins of 10.5% increased 220 basis points over the prior year quarter.
The primary drivers were increased volumes on mature programs and a decrease in bad debt expense that reduced the prior year's third quarter results.
Civil recorded nearly 1 billion in net bookings for the quarter, resulting in a 1.3 time book to Bill and 2.4 on a trailing 12 month basis.
And finally, turning to our health segment.
Health segment revenues increased 2.4% over the prior year quarter and 30% sequentially.
Additionally, after adjusting for acquisition and divestiture activity health revenues grew 5.8% organically.
This growth was directly attributable to the hard work accomplished by our team to both reopen and ramp the medical exam business back to pre co bid levels faster than previously forecasted.
Health segment non-GAAP operating margins were strong at 16.3% an increase of 150 basis points over the prior year quarter, reflecting the accelerated recovery in our medical exam business.
Yes, it sure of the health staff augmentation business in the third quarter of 2019, and a reduction in business investments.
The health segment booked over 1.5 billion in net awards driven by an increased backlog in the medical exam business based on sustained elevated case deliveries end demand.
This 13% growth over the prior year period resulted in a 3.0 book to Bill for the quarter and a 1.0 on a trailing 12 month basis.
Moving now to the remainder of the year.
With the strength of our Q3 results we are revising our 2020 guidance as follows.
We expect revenue for the year to be between 12.3, and 12.5 billion reaffirming the prior midpoint and tightening the range.
This update reflects the execution of our strategy outlined in the second quarter earnings call.
Returning to normalized run rates and business mix in the fourth quarter.
We expect adjusted EBITDA margins for the year between 10.6, and 10.8% 60 basis point increase at the midpoint from the previous guidance.
This reflects the improved margins in the third quarter from Hi, staff utilization reduced indirect costs and strong program execution across the entire business.
We now expect non-GAAP diluted earnings per share between $5.65 to 585, an increase of 35 cents at the midpoint of the prior guide.
Finally, we expect cash from operations to be add at least 1.2 billion consistent with the prior guide however, due to the strong cash flow generated on a year to date basis, coupled with the additional liquidity stemming from the October bond deal, we no longer anticipate any full year contribution.
And from our existing a our monetization facility, whereas the prior guidance had assumed 300 million.
As we look to the coming year, the accelerated recovery, we have seen during the third quarter, along with our strong level of contract awards. This year gives us increased confidence that we will have a strong 2021.
Assuming continued success in defending the awards that are in protest and our customers continued ability to adapt to the pandemic, we could achieve organic revenue growth in 2021 of at least 10% to 12% and adjusted EBITDA margin of approximately 10.3% or better.
As is our normal business process, a practice formal 2021 guidance will be discussed at our first our fourth quarter earnings conference call and with that I'll turn the call over to Rob. So we can take some questions.
Thank you well now be conducting a question and answer session sector.
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One moment, please while we poll for questions.
Thank you. Our first question today comes from the line of Joseph Denardi with Stifel. Please proceed with your questions.
Oh, Thanks, good morning.
Hi, Good morning, Joe.
Yes. Good morning, Jim can you maybe just provide some of the puts and takes that go into the the margin commentary for next year that you just talked about.
Maybe what are some of the headwinds how much of that is tied to coconut versus.
Newer opportunities ramping up thank you.
Sure for next year, Joe we don't see a significant headwind related to coded and you guys as Weve said in the call.
We're we're really finding ourselves.
Within with a reduction in run rate in indirect expenses strong program execution and in terms of how were thinking about next year I want to make sure I reiterate the fact that this is really preliminary.
And it's based on where we see the numbers penciling out for next year, we're right in the middle of our planning process.
And right now we're seeing some ability to sustain the state the strength in margins that we're seeing in the third quarter. The only real headwinds that are worth pointing out right now that we have to be cognizant of is that we have a couple of very large new programs ramping in the coming year and as we've said before typically.
Margins on those programs can be as low as low single digits. We think of our entire company is a portfolio of programs and and while there are a number of programs that have margins that continue to increase.
That we do have a couple of big programs, where we have early stage.
Jun pressure that typically starts to resolve itself. After the first couple of years of these long term programs and that's really what that reflects.
We feel like.
Given the portfolio that we have.
We're definitely going to be seeing strengthening margins.
Into next year.
Okay Thats helpful. And then Roger I'm wondering you just talk about kind of the overall award environment book to Bill is may be a little seasonally light you're not alone from your peers have reported similar but are you did you see any kind of slowdown in the quarter or do you see pent up demand over the next few quarters. Thank you.
It may be a little there's we have a.
A program.
With the Fey that.
Yes, we say its going to award any weak and then.
Don't know which week.
I think our our book to Bill was probably impacted more by protests one of those program was.
This was the second protest.
And we had sort of hope that we had answered all the issues from the first protest and we're optimistic that we would have booked that in the quarter and it turned out that that didn't happen.
Then.
Navy Nexgen.
Got delayed about another two weeks so.
I just I know, there's always some delays to the right even in good times before cobot, it's there's within a given month, it's a little bit unpredictable and with the government's fiscal year. There was stuff that was trying to get out within the quarter and sled.
We think we'll pick most of that up in fourth quarter.
And we haven't seen from the customer activities like an effect from that or whether we call ourselves and the second wave or third wave or whatever you want to call where we are now.
But it certainly I don't see things accelerating, but I think they're kind of going at the usual pace. So.
For us really the the 1.3 really as a protest story. Thanks Joe.
Yes. Thank you.
The next question is from the line of Seth Seifman with Jpmorgan. Please proceed with your questions.
Hey, thanks, very much and good morning.
More center in that market.
In that outlook for.
Next year in terms of how you think about the duration of the continuing resolution and at what point. It starts to have an impact given that we could have been extended one following the election.
Yes, our base assumption is that we get a.
Another CR on the 11th of December and includes 36, 10, and frankly, it probably goes to March.
We we get through whatever happens tomorrow and Thats its effect on January and it's either the current administration and they have a lot of vacancies they want to fill or it's a new administration havent vacancies.
I think our assumption is year, they're going to see our way all the way through that.
Until they fill out their leadership team and so it could be march could be even beyond that and there's precedence for this we've seen it before so it's fully baked into our thoughts about the future.
And that means you'll be halfway through the government fiscal year before you actually get a bill but again.
We have all been doing this a long time, we've seen that before and.
Frankly, yes, there may even be an advantage is because if we get to see our than everybody holds onto the budgets that they had last year and you don't see a lot of reprioritization.
Amongst different programs a different agencies, so no I don't see much impact.
Great. Thanks, and then if I could just follow up quickly on the two acquisitions and their contributions in the quarter very nice sequential pickup on the index and just how things are tracking there.
Versus your expectations for the year and into 2001 and slight sequential step down in airport security products and kind of how things are shaping up there given what's happening in the air travel environment, Yes, I'll do sort of the qualitative and if Jim wants to put a little bit of quantitative out there he can.
But.
Let me start from the active integrating okay. That's back office systems people and the both dynamics and secure.
Security detection automation business are doing really quite well and we're ahead of our milestones were getting systems converted Pete.
People convert into our employee system and so that's that's going really really well.
From a leadership standpoint, we're just really pleased and.
I'm.
Excited that the leadership team of both organizations have continued to stay and we're very happy that.
We've literally we launched nobody off of either either senior leadership team.
Kinetics business because of land or in some other things is.
I head of our expectations and we integrated them with our latest innovation center and that has really created some cross linking into our existing R&D business, which is really really exciting.
I think you touched on what's going on in air traffic.
We're over a million passengers like two weeks ago, and then sort of second wave as temper that a little bit and so we have seen we've got a couple foreign bids that have gotten delayed by a couple of weeks.
TSK is actually move forward with CTP at the checkpoint opportunities, but our expectation is it's going to be a long recovery.
And orders are going to stretch to the right and so.
There was I think a cause to have a balanced view of our secured do textured automation business, but and.
By way for Us Thats almost good because we get a chance to really focus on integration and get those systems and processes.
Into what we call the Leidos business framework, and where we want them before we see any significant ramp up but.
The wishing air traffic I think the UK just went on a month shutdown and so this second wave third wave is going to be problematic and I.
I think were very circumspect about that and its effect. It will have on our business, but a great opportunity for us to get RCT product to the market and to get things through the qualification process with TSA. So again, we're very excited about that business.
It's just we're in the middle of this.
Second second wave in the pandemic, Jim I know, if you want to talk about numbers.
Just to amplify what you said Roger the the business the dynamics business is performing.
In some metrics better than we expected on some newer were spot on and we're pleased with how that business is accelerating through the integration and as you said that's tempered with the other acquisition, which is seeing some some of the Cobi 19 impacts not so much with.
When rates, but more how some awards in some deliveries have been pushed out as a result of the pandemic. Thanks.
Great. Thank you very much.
You're welcome.
The next question's from the line of Matt acres with Barclays. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question good morning, Matt.
I wanted to follow up real quickly on the CR commentary and.
I needed 36 patent extension.
I just wanted to ask how important is that specifically I think based on some of the commentary from some of your peers I think it sounded like a lot of people.
Pillar by 36, 10 that already sort of return to work. So if you could just comment on sort of how big that is for you.
Yes, well I'm happy to share our numbers show, 97% of our team is back at work on regular hours. So we have really only about a percent and a half at a reduced standing and thats. The people that would really be affected by 36 10 and then.
We have.
One and a half is kind of miscellaneous just some structural things and so it's it's it's really not a big impact for us anymore, I think thats, yeah, we've seen that across the industry and certainly our peers in these agencies.
I think.
Theres some things around 36 tend to maybe more important for.
Some of the bigger aerospace primes relative to factories and things, but that doesn't affect.
Many of our programs.
Because of the nature, our work which is really.
People come into work and you know you are writing software and doing mission and things like that and so.
Not as important as it was at the beginning of this journey will still be nice to have.
And but.
We don't see a major impact.
Okay. Thanks, Thats helpful. I guess, if I could just one more on sort of budget risk next year I think that that's kind of the biggest concern.
From an investor, but I guess, if you just sort of look across your addressable market.
Are there certain areas that you think are maybe more susceptible to the budget cuts, but as you look out over the next couple of years as opposed to maybe other areas that you think are more well protected and then how do you think about sort of positioning lydalls within that.
Yes, I know, we've talked about at the last quarter and I'll just reiterate some of our themes.
So if you're in support of legacy programs within DMD I mean, that's probably not a great place to be you want to be in the emerging technologies I think regardless of who gets elected.
And the Biden campaign has come out and said that they are they're not looking to cut defense.
And and we think Thats true that means that there is not going to cut it it probably wouldn't grow it as fast as.
Second Trump administration would then is shifting our priorities.
Well I I think biden is going to kind of go back to international alliances and.
Maybe reopened trade I think a Trump will continue what he has done.
We think any any any.
Administration.
Yes, pandemic response health care civil infrastructure.
Thank our return to the Moon program is strongly supported by the way from both sides of the aisle both administrations have said that in.
And I've said this in.
Many many calls is.
Everybody gets elected or reelected with hopes and ambitions and instead of priorities and then you walk in the office and you're faced with a record deficit Yo.
So areas of eight 9% unemployment and.
You are on the precipice of or recession, and so I think either administration is going to look for another carrier's relief Act I think the tax increase which is reported in abide administration will be delayed because the last thing I want to do is tamp down economic.
Growth because that's how we pull ourselves out of this.
Large unemployment and so I actually think that.
No 2021 looks a lot like 2020.
And 2022 is already in planning is in what we call the palm and ERP cycle. If you talk to customers they've already put their budgets and for 22 and of course, our backlog takes us well into 23 and 24 before our program started to be affected and so there will be changes in priorities more.
Civil infrastructure I think we've got to get pandemic response, ready and that CDC and organizations like FEMA and I do in USA IDN NIH, all of which we have been carefully positioning the company.
The balanced portfolio to be will address what would be a shifting priorities in the federal government and so we're very happy with where we're positioned and we're going to continue to.
Stamp late Tomorrow night, and see who gets elected but I think we're going to be in great shape either way.
Great. Thank you.
Yes ma'am.
Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your questions.
Hi, Good morning, Roger and Jim Hi, Good morning, Sheila.
Roger don't tell US 2020 one's going to look like 2020, I don't think anybody wants that so yes.
Great point actually break point.
I wanted to ask first on revenue drivers and defense and civil what's going on in those businesses I. Appreciate the X. cobot impact they were up 6.2% organically. So what are some of the puts and takes and how do we think about this going forward.
Before Jim answers and I'll just comment when the kids come around on Halloween dressed as a calendar named 2020.
You know nobody wants to repeat what we did this year exactly yeah.
Yes, so in particular to defense and civil revenue drivers both for its actually for the back end of this year and into next.
Some program wins that represented takeaways.
And and growth in existing programs.
Are really the drivers and we had.
An air Force takeaway for example, I'll just give you a couple of examples.
Something called a CCIX are.
Which was a takeaway there is.
A contract in CBP that is a traveler vetting system contract that we won and these are the kinds of things that are providing us organic growth and again, that's in the defense business.
If we want to think about in the civil.
Inorganically, obviously its S. DNA, but there is also some growth of existing programs that were looking at.
For next year and the deal we.
The NPL contract is is one example, and then also so we have some.
Expansion in our MSR contract there as well so that those are the things that have been driving revenue growth, but probably also interesting is margin expansion that we're seeing both in those two businesses and really across the whole portfolio that has to do with.
Really strong program performance and effective management of indirect costs as we kind of work through the pandemic and these have been things that have more than offset.
Some of the.
Headwinds that we've had from COVID-19, and it really is a testament to the program teams and the management team that that are out there driving those those improvements.
Okay. Thanks, Jim for that and then one more for you because we can't seemingly keep up with your puts and takes for free cash flow.
Yes.
So just to clarify on that because of the pre funding of the billion dollar bond or.
The financing of that how do we think about aer.
For this year is it net neutral and.
How that flows over to 2021.
So for the full year the impact of our HR monetization facility is going to be zero. Previously we had included in our guidance a $300 million add that shows up in operating cash flow that is in effect the the sale of our receivables.
At a very very low cost of capital and.
We don't need to do that now to maintain the level of liquidity that we want we've got ample liquidity. So we don't need that anymore. So you can think about.
Ill.
The 1.2 billion dollar guide that we have today as being a 300 million dollar improvement from a performance standpoint versus where we were last quarter.
Okay, great. Thank you. Thank you all right. Thanks Sheila.
Our next question is from the line of Cai von Rumohr with Cowen. Please proceed with your questions.
Yes, thank you very much.
Could you just refresh us in terms of the defense health and.
The army so calm protest approximately how large were they and when do you expect the protest.
Timeline to be over.
Okay Kai let me see if I can I can get these right.
First of all the total number we have in protest is about $9.3 billion.
If you add all the programs that we have collectively.
The.
What we call our HRP program is rounded to a billion.
Give or take a little bit and it does mean, that's exactly what we'll book when we achieved the protest and I think Thats in January Ryan is we don't get that till January and then.
The other program, we referred to it as stamp.
Which stands on of course for something is about 600 $650 million and then of course, you add nexgen to that.
At about eight maybe a little less than that 7778 and that gets you to about $9.3 billion and I think the.
The stamp we're hopeful will happen in fourth quarter. So.
If it doesn't get re protested which we're getting used to but.
And then Navy Nexgen, you Didnt ask I touched on in my remarks, we're kind of.
Whether it's before Thanksgiving or after Thanksgiving.
Hard to tell you do oral arguments in the court of federal claims is not.
You can't set your clock by like you can with the Geo and so we will go to oral arguments and we are in the hands of the judge and.
He can make a ruling anytime after oral arguments from.
That data probably a couple of weeks.
Terrific and then the second one would be you know.
Your margins were good and you mentioned you know you've talked about the cove it headwind to what extent do you feel the Cove. It was a tailwind in terms of indirect expenses benefiting from lower travel and meeting expenses and utilization benefiting from lower paid vacation time off because.
There's fewer places for people to go yeah, Cai that certainly we're certainly a factor I don't know, whether it's 20 or 30, Bips, maybe something like that I mean, it's it's a little hard to.
To put our finger on it.
But clearly made a difference and our medical costs are are down double digit millions and.
The challenge for all of us, but when and that's.
It's all relatively good luck.
The challenge I think for us and for the industry is to decide what comes back and what doesn't.
You know, we're at somewhere between 25, and 50% occupancy in our buildings and we're running just fine.
We have 65% of our employees are telecommuting and they are doing reasonably well I think you know.
Actually very well and we start to look at 2021, and say we need less real estate.
We don't need to go to all the trade shows that we've been too or at least not in person or some of the virtual work that we've done on a USA anything they have worked actually extremely well, we've actually talked to more general officers because you can zoom and you can do one right. After another and you know they don't get caught.
Somebody else's showboat right. So we.
We are.
Really taking a look at the lessons learned and we want to capture and internalize.
A significant portion of that reduction in our margin going forward and I think you're seeing that across the board.
Terrific. Thank you very much yeah. Thanks, guys.
The next question is from the line of Jon Raviv with Citigroup. Please proceed with your questions.
Hi, Thank you I was going to ask Sheilas question, but Jim since you Didnt fully hit certain maybe I'll take another whack at it it just about big moving pieces into 2021, thanks for clarifying that they are this year.
Thinking about 21 over 20 cash flow, we sort of still looking at about $1 billion operating cash I think that number's been thrown around previously or can we actually sustain at this one point to a greater going into 21 with all those moving pieces, including payroll tax and whatnot. Thank you yes.
John will we'll have more to say about that when we issue our guidance at the end of the fourth quarter call.
Yeah, we were purposeful and not.
Putting all the details out there because we're we're we're still working through that I would tell you that.
This year's been benefit has been benefited.
Significantly by the ability to defer taxes into next year, and we'll have a lot of the moving parts for that available. When we give you the kind of a walk of this year's cash flow to next year another.
Another thing you have to remember is that next year, we're not going to have a repeat of kinetics that was you know 80 million. So.
The strength of this year's cash conversion.
Is is really been on the backs of that cares Act legislation for Netflix strong program performance and our continued focus on monetizing.
Receivables getting things build faster getting them collected faster so.
Now we always have these things that I referred to is recurring nonrecurrings, but we just we can't plan those but you know who knows what next year's tailwind on cash while it might be but like I said, we'll have more to say about that in next quarter's call.
No I appreciate that thanks, Jim and then just on Europe.
Incremental debt raised to just clarify.
How much are you actually taking out with 1 billion or is it all just additional and then you mentioned your capital priorities, but without additional debt you're sort of looking you mentioned some tuck in M&A capabilities. What are some of those opportunities that might be out there at this point size wise end market wise and capability wise. Thank you yeah I'll answer the first.
Part of that question and Roger can speak to the second half about what we might be interested in but that out of the billion dollar raise we paid off debt to the tune of 750, and we left 250 million.
In the cash account to give us the kind of flexibility that we're talking about.
And then Roger can speak to the kinds of things that could represent tuck ins.
We don't have anything specific but like I said, we want to have some flexibility and that's why we're keeping some cash around.
You know John.
We're always you know.
Work on our pipeline of.
Where do we want to be what are the technologies that support the programs that we see three and five years out and then we take a look internally.
Within what we call our technical core competencies, and whether we're deep enough or not and.
That tends to be kind of a make buy decision and time to market and.
Yes, there is.
At any given time, we'll have a half a dozen.
50 to 250 million dollar deals kind of in a pipeline and.
Some are in diligence some were just wishful.
And you don't really have anything to say at this time of course, we never comment on M&A anyway, but.
I don't think anything that's going to.
Surprise, you I mean that you've been listening to the call as you know where were moving and did.
Digital transformation Hypersonics space.
Cyber physical cyber.
Electronic warfare that the whole list that we've been talking about for a long time and and there are some companies that have been kind.
Canopy or venture capital that are looking for.
Liquidity event and.
By one point I made before maybe interesting to to remind everyone. Usually the companies that we buy we've had a relationship with.
For a long time, we do overnight or they might be a sub to us we've probably been working with these companies four or five years, some up to a decade and we know the management team well, we know the technology, well and especially the culture of the company.
Culture is really a big thing for us and we want people.
That will fit with our organization, we are a little different.
Because we're we're employee owned for so long, which sort of a more of an open collaborative culture and culture is really big deal for us but.
And if it doesn't work out that we're happy to have them you know in a partnership relationship going forward, but but that's kind of what we're looking at.
Thank you.
The next question's from the line of Rob Spingarn with Credit Suisse. Please proceed with your question.
Hey, good morning, Hey, good morning, Rob.
I know you don't want to guide to next year, but you did mention that 10% to 12% and understanding that there is some moving pieces in delays in protest. So forth is there a way to talk about that qualitatively by segment.
Well, Rob we don't.
As we've said before we don't guide by segment right.
But you had to speak to it qualitatively it is.
It really is based on.
We're kind of halfway through or near maybe two thirds the way through planning for next year and.
The the <unk>.
Early returns that are coming up from the units are consistent with kind of what the top down math looks like you know strong book to bill over the last 12 months the contract lines haven't gotten longer we have some really big enterprise I T programs that are ramping and.
And with those we we we could easily pencil out growth.
To the tune of what we said earlier on the call.
But by segment.
Today, we're seeing expanding margins across each one of our segments and we think that.
Next year could have.
Some strong organic growth across the entire business, because we're and we're pleased that across the portfolio everything has strong book to bills and that translates to strong organic growth fixture Hey, Rob Let me.
Jump on the back of that is given our last two quarters and what happened in our health business and the amount of time, we spent with the community on how the exam business works.
And we tried to be as transparent as we could as it if we get to the point, where the our clinics or are shut.
Shut down we can't do exams and so we went through that period as of course, everyone everyone saw but those as we have said we said on last call would just repeat again the exams don't go away those disability exams, whether department of labor for the veterans are for workman's comp still have to get done.
And so we're now faced with sort of an inventory of the exams, we have to work our way through and so we're fortunate we ended the third quarter at higher than cobot levels, although for the quarter, we were probably kind of at or about where we were before starting lower ending higher but we now have to work through that inventory.
Three other exams and thats going to take us well into 21 to do so so we again, we tried to be transparent with everybody. When we had to shut down the clinics, where it would look like when we were opened were now reopened all of our clinics are open.
We still have pp and we have to have appropriate protocols, because the pandemic is clearly alive and well out there, but we expect sort of the tailwind certainly from the exam business to go significantly under 21.
Okay.
Similar question, maybe higher level and looking out a little bit further but with the.
The potential changes in strategy, if we have a change in administration.
Longer term Roger how do we think about your service exposure.
Changing in the defense business I'm talking about Army Navy Air Force exposure.
Is that something you can speak about.
Yeah.
Well I'll touch a little bit and then maybe if we have time at the end you can ask a second question.
Yes.
And I guess I always get wrapped up in when you use the word service.
I want to stop in and talk about you know the the lower end services is not the business that you find the Leidos is in is that we tend to be mission focused we don't do so.
Services right, we do solutions, and we partner with our customers on mission, but.
A comment maybe we're leading to is like what will happen in the AOL are in the middle East and.
Trump had made a commitment to pull troops down and there have been troops we have reduced our footprint in the middle East and I think we all anticipated that.
That is likely to continue I think under either administration number is not going to go to zero and part of what we do is we provide support not for the U.S. troops, but for the Afghans.
Some of our aviation programs are in direct support of Afghan operations by Afghanis, but we could see sort of a slowing down of some of the work that we do in theater, which frankly is a wonderful thing. It means we don't have troops at risk.
But the customers are going to take that.
That obligation, it's already and you're going to spend it in other areas. They may spend it in modernization, which is great for us because we're well positioned in the future of our customers.
But what we've all learned is that if a quiets down in Iraq, and Afghanistan, it's going to get hot someplace else and Unfortunately history has told US is that there is always a place to deploy troops and.
But I would tell you that we have been fortunate to subtly shift our portfolio out of.
That very very low end and our OCO numbers are very small and and so we are fairly well insulated.
Two what I would call that pure services play if that were to be deemphasized in the budget.
Yes, what I was thinking about is just if you just.
Largest army became a bill pay or for growth at Air Force Navy ended space clearly at dynamics you have very good exposure all those growing thing. So that's the way I was thinking about it that's certainly something that investors are asking us.
Yeah.
And again, we are Oh, Wow that you go well come back I would simply say we haven't seen it.
Our support contracts for the army are doing fine I think theres, some things around army and strengthen requires a longer conversation I'd, rather not use everybody else's time, but.
Rob maybe we'll call you after the call and we can talk a little bit more about what we think is going on in Europe.
Okay.
Thanks.
The next question is from the line of Peter Arment with Robert W. Baird. Please proceed with your question.
Yes, Thanks, good morning, Jim.
Roger I, just maybe just to talk.
About a kind.
Kind of a follow on to Rob's question about 21, just specifically when we think about the DNA business is just to clarify do we do is there an expectation that that visibility. There in 21 will actually will see a return to growth for that business or how should we be thinking about this the revenue profile of that business.
It's a little early for us to know with specificity that part of what we call our security products business, which is actually being integrated in with the legacy Leidos business I think that right now we're not viewing that as being a big grower for next year just bill.
Because of the what we think of as kind of the hang over from COVID-19. However, yeah. We can probably have more color on that in the next call is as we have more visibility into how well the order pipeline has developed.
Okay, and just as a quick follow on just regarding your ability in general to add new hires.
In this environment how is how is that been proceeding. Thanks. It is it's been terrific.
We went to a virtual hiring platform, we do virtual new employee orientation we.
We've got employees, who are part of the company are working from home, who have never been to a leidos building and we're very very fortunate.
People see what's going on at the company they understand our culture. They love the work they love working together and they love the workplace flexibility that we now offer.
And so high hiring has not been a constraint for us.
Now we were hoping that we would have had navy nexgen and our portfolio by now.
That is going to require.
Significant literally above a thousand people and we hope that will be our problem next year and we'll we'll add that and of course, we've added a lot of people through the acquisitions the dynamics and the.
The S. DNA, all told between direct hiring and acquisitions will probably add around 9000 people this year.
Terrific. Thanks, so much.
Thank you the next questions on the line of Kevin Parsons with Goldman Sachs. Please proceed with your question.
Hey, good morning.
Good morning, Ed Good morning, Evan.
Jim just a quick one of them guidance assumptions last quarter, you guys provided a pretty helpful. Slide on the sizing of cold weather in the engine push out I was wondering if you could just.
Update us on the 2020 expected impact of Copel to revenue and EBITDA.
We haven't provided anything specific I can tell you that did change and the expectation on Cobi 19. In 2020 is the revenue impact is going to be a little bigger, but it isn't materially bigger and the operating income impact on Cobi 19 for the full year is a little bit lower.
Because of the recovery that we've seen in Q3 being a little bit faster than we had expected when we talk to you a quarter ago.
Sorry, just to clarify you're saying the revenue headwind is larger than you had been anticipating last quarter for all of this year, a little bit not I wouldn't call. It material, it's a small number.
Got it Okay, and then Roger the the comment on visibility into growth is really helpful. Just on you know the authority.
As catching up to authority on obligated balances are your visibility in the backlog, but if I look at kind of the the May investor day and the net.
His vision of a 5% addressable growth CAGR for your addressable markets.
How do you think about your planning differently given the political uncertainty of the budget deficit and then whether or not you are still on a growth posture for a five year outlook, and then whether or not that changes how you plan for the business. Thanks, yes, Okay I'll try to be short because I know, we're running late but first of all you raise the obligated.
Balance.
By our numbers, it's a 130 billion. So there's a ton of budget overhang of if you will on spent prior.
Authorized balances so.
Add on to the CR and you see your way through 21 and 22.
And clearly in our Investor day, we were talking 5%, we're kind of our conversation now begins at 10 and goes goes north from there.
We.
We run the same.
Scenario as everybody else does what is the federal deficit, what's it takes to get to a balanced budget and.
You know that those numbers are in such large magnitude I mean, you could remove the NASA budget completely.
And you don't even make a dent.
So we have some longer structural things as a country that we need to better understand and theres some inflation.
He has to happen once you can pay debt off 10 years with inflated dollars and things but.
What we have heard talking to both administrations and the hill is.
We need economic growth, that's what's going to get us back on firm footing and you can't make huge reductions in the in federal spending and get the economic recovery that you need over the next three to five years. So.
We may see a little bit of topline temperament.
But I think the big change that we're going to see is some.
Yes, if find where to get elected versus Trump a reprioritization of what is of federal government government budget. It grows kind of with GMP. So you're talking 2.72, 0.8%, maybe 3% GNP growth and if you plot history.
President to president the federal government spending is pretty constant what changes his priorities within the two administrations are within deferring administrations and we think we've done a really good job of portfolio. This company. So that we can shift to more health and infrastructure.
Sure.
If.
Biden go from where to go in that direction.
We've talked a lot and I don't want to go on too much but I.
I don't think you solve the deficit problem with spending I think you're going to have to find sources of revenue and everybody says over that means taxes, and we said, yes, probably eventually we can see the corporate rate start to creep back to where it was but other sources of revenue like users fees at parks and things like that it's just what's going to have to.
Happen.
You know there's.
Going to take some smarter people than I to figure out how we pay off these trillions and trillions of dollars that we've we borrowed to keep people employed so but with that I think we were again, we've got to wrap it up but we can follow up with you on one on one.
Thanks.
Thank you at this time I will turn the floor back to management for closing comments.
Okay. Thanks, Rob. Thank you all for your time this morning, and your interest in light as 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.