Q2 2021 Perspecta Inc Earnings Call
Good day and welcome to the perspective Q2 fiscal year 2021 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
Ill now turn the conference over to Michael P.C.B., Vice President Investor Relations. Please go ahead.
Thank you and welcome everyone to our second quarter fiscal year 2021 earnings conference call participating on the call today are Matt Curtis, our chairman and CEO, John cabin <unk>, our CFO. This.
This call is being webcast on the Investor relations portion of our website at perspective Dot Com, where we also have posted the earnings release and financial presentation slides to supplement our comments today.
Turning to slide two of the presentation.
Before we begin please note that during this call we'll make several forward looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results.
For a full discussion of these risk factors and uncertainties. Please refer to our SEC filings under our latest form 10-K. In addition, these statements represent our views as of today and subsequent events may cause our views to change we may elect to update the forward looking statements, we specifically disclaim any obligation to do so.
Finally, as shown on slide three well discuss some non-GAAP financial measures that we believe provide useful information for investors.
Slide presentation for todays call includes reconciliations to the most closely comparable GAAP measures.
This time, it's my pleasure to turn the call over to Mac will begin on slide four.
Thank you Mike. Thank you all for joining us this afternoon.
I'm very pleased with respect to its performance.
Second quarter of fiscal year, 2021, which exceeded expectations on all our key financial metrics.
Today I want to focus on four key messages first I'll provide a brief update on our transition back to the new normal as a result of COVID-19.
Second we'll review the continued strong execution as demonstrated by our Q2 results.
Third will provide an update on the terrific progress our business development team continues to make the fourth I'll provide commentary on some of the enduring macro trends in the market and I suspect is well position to leverage those trends.
Now turning to slide four let me begin once again by expressing our heartfelt sympathy for everyone who's been affected by COVID-19.
Our first priority continues to be the health and safety of our employees an extended workforce.
The work, we perform as Ben deemed critical infrastructure and essential National security.
Weve effectively managed through the disruptions to our business.
We have implemented extra precautions to ensure our offices remain open to support mission and that's just critical operations yes.
The impacts were felt mainly in our defense and intelligence business.
We continue to see program starts and deal flow delays, primarily within the intelligence business. In addition to revenue and profit then backs.
Taking them out of the situation and the potential impact on our business in John Trustees.
In his prepared remarks.
Weve transitioned back to the new normal what we call teachers and to our dedicated team has developed a framework to transition safely and over 70% of our sites are now approaching 50% occupancy.
We remain dedicated to ensuring the safety of our employees, while continuing to meet our commitments to support our customers' mission.
To that end in early October we opened our new offices in the Georgia Cyber Center at Augusta, which is strategically located located close to the U.S. Army cyber command or our cyber customer headquartered there nearby for Gordon.
The Georgia Cyber center offers the perfect environment to attract highly skilled cyber professionals needed to solve mission critical complex cyber challenges. We're excited to make the move for Gordon alongside our our cyber customer and we're honored to sport that Mason defend our nation and this incredible domain.
Moving to our second key message for today, we continue to consistently deliver on our growth margin earnings and cash commitments revenue year over year was up 4%. Excluding the 60 million dollar one time NASA asset sale in the prior year and the impact of Cove. It.
Adjusted EBITDA was 179 million and adjusted diluted EPS was 53 cents, which does include the impact of Cove in the quarter right.
Free cash flow conversion for quarters, 156% I.
Adjusted net income again exceeding our full year target.
The focus on execution during these challenging times, we've delivered a solid first half of fiscal year 21, and we're raising our full year guidance.
John will provide more on this moment.
Third bookings were strong with 1.8 billion, representing a book to bill ratio in the second quarter, a 1.6 times.
I want to point out that we reported our third highest book to bill ratio since becoming a public company and especially notable result, given the challenges of the past several months.
I'm also pleased that 42% of our bookings this quarter represent new business for perspective.
Excluding Amgen Smit, our book to Bill ratio was 1.9 times and our trailing 12 month book to Bill is 1.6 times with new business a 57%.
At the end of the second quarter. Our total backlog was 13.9 billion and our funded backlog was 1.8 billion.
Excluding Amgen Smith, our total backlog is up approximately $500 million and our funded backlog is up approximately $100 million versus the prior quarter.
Oh The award sought our combination of customer insight deliver excellence in contract vehicles allow us to maximize results during the government's ended the year buying season.
We saw significant sole source awards in our classified mission space, a number of midsize New awards robust add ons to existing contracts and a great quarter for my perspective labs team, who continue to lead the way and solving some of our government's hardest problems.
Specifically during the quarter, we received multiple awards on classified systems engineering integration and cloud migration programs supporting various U.S. government customers that's.
Total become potential contract value of these awards is $590 million each.
These awards once again demonstrate our close alignment to our customers critical mission needs.
Back to labs had a solid quarter signing a number of new business awards focused on developing unique approaches to solve tomorrow's problems ratings.
A great example of this is the New war, we were awarded by DARPA to develop technologies for improving security a fiveg networks, which is a key enabler for our customer we know that Fiveg is one of the highest priorities with Indio, Dan will fundamentally transform telecommunication networks. However.
However, the unexpected deployment of Fiveg networks poses a significant security risks do the proliferation of foreign and uninterested hardware devices.
Prospective labs is helping to address five you security issues through the creation of an architecture that did couple of hardware and software ecosystems.
Now this allows for secure operation over on trusted hardware and reduces the risk of supply chain attacks and other vulnerabilities.
I work, helping to secure these next generation networks for our customers to realize the full potential of Fiveg.
This strategic work and other programs continue to possess perspective labs as a leader in the development of innovative solutions for DMD supporting commercial wireless technologies and five G, which is a significant growth area in this market.
And our survey and health segment, we were awarded a cloud migration contracts supporting the California State teachers retirement system.
This program, we will be using agile teams to move critical applications to cloud platform and.
In addition, we'll providing cloud operations security, an overall program management services.
The award, which represents new work for the company has a total potential contract value of $43 million.
We reported $119 million in additional new business awards across smaller programs during the quarter.
Our team focus on the end of government fiscal year drove significant add on business by leveraging our existing contracts and programs we.
We benefited from our close customer relationships and discriminating capabilities and machine on contract growth and extension awards on multiple programs totaling $657 million during the quarter.
Now early in the third quarter, we were awarded the initial contract with the space Development Agency.
To provide mission systems engineering and integration support.
Perspective will provide overall technical leadership for integrating traunch zero elements and existing on orbit testing experiments, culminating in a capstone event, which demonstrates potential war capabilities to the warfighter.
This sole source I'd ask you has a ceiling value of $112 million and we're extremely pleased to have been selected for this critical mission.
Looking ahead, our three year qualified pipeline remains robust at $82 billion, which is heavily weighted towards new business.
Now fourth I want to address our strategic positioning and lay out how we think about the outlook for our business. You heard me say that a key focus area for us and staying close to the customer's mission and ensuring our strategic priorities align with that commitment is secure whenever the customers today is laser focused on driving improvements in their technical infrastructure.
While looking for value.
Those decisions are being driven by several critical factors, including cloud migration cyber security artificial intelligence machine learning Dab SEC absolution, and the overall drive toward modernizing our nation's most critical infrastructure.
COVID-19, it accelerated many of these trends as our customers are focused on safeguarding supply chains mitigating risks and securing broadband solutions, it's telework becomes a larger.
And in some cases permanent part of workplace conditions.
These dynamics provide real opportunities for us to leverage our deep customer intimacy and relationships to provide innovative solutions that drive mission values improve the customer experience and fuel our future growth.
Forecasted customer spend in these areas a launch tightly with our strategic priorities and investment strategy.
Strong spending is expected in I.T. modernization is the move to the cloud application modernization accelerates likewise, there's an expectation that the focus on cyber security and trusted environment will give continue given the increased threats around networks infrastructure and supply chains.
And finally, we expect to be a heavy emphasis artificial intelligence machine learning and five G. As our nation's strives to be a global leader in these key technologies.
These areas, which have increasing importance to our customers have near mid and long term staying power in perspective is well positioned to address their needs.
Let me share a few examples with you would emphasize the point.
I respect the labs, our innovation engine and leader and applied Cyber research at DARPA continues to develop innovative solutions such as bus the vendor secure Io as I mentioned earlier solutions to support secure five G cyber initiatives.
The bus to Vanda protect complex war fighting systems and networks from cyber attacks.
Our portfolio of offerings are further enhanced by the electronic warfare capabilities. Our recent acquisition of D.H.P.C. technologies, a lot perspective pursue the emerging opportunity of cyber and electronic warfare conversions.
Chicago, our commercial solutions for classified for C. S. F C offering helps government customers obtain NSF approval for safely using wireless networks to handle classify communication on commodity hardware.
<unk> protecting the data at rest.
If you recall last quarter.
Provide a deeper dive on our Hs went for the U.S. Army. That's a prime example of a consolidation of 20 disparate systems.
A single entry cloud based solution, which enhances the end user experience and provides more actionable data for the customer.
This quarter, we received the Cow Stars award, which is another cloud migration program I.
Additionally, we see the authority to operate the cloud solution portion of the Department Educations next generation data Center program all of these demonstrate our commitment to cloud migration.
Lastly through the first half of fiscal year 2021, we've recorded multiple awards in our NGL business with a total contract value of $889 million.
He is overriding mission support to deliver high and systems engineering integration data analytics cyber security cloud I T services and software development.
Our through your pipeline a key enabler continue our future growth is full of opportunities it mapping its large and emerging trends at.
That are aligned with key customer objectives upon.
Approximately 54%.
Is aligned to cloud enterprise managed services.
13% is pure cyber security programs, 21% for high end systems engineering, and integration and 12% for artificial intelligence machine learning learning, including our market, leading work and the trusted environment.
As you can see.
The business is performing well, we're confident that we're properly positioned around the right capabilities customer spending priorities to continue to drive growth over the long term.
Having said that as you can imagine we're disappointed that our share price does not appropriately reflects our performance in the strength of our outlook.
I can tell you that this management team is incredibly focused on driving shareholder value and we continue to focus on ways to ensure that the stock price reflects the true value of our business and outlook.
Our portfolio is resilient.
Our team continues to execute its pandemic and we're executing what we can control.
With that I will turn the call over to John.
Thanks, Mac and good afternoon, everyone I'm very pleased with our second quarter performance as we continue our quarterly trend of solid execution.
Turning to slide five.
Revenue for the quarter was 1.14 billion.
Results. This quarter include an 18 million cobot impact.
Revenue growth, excluding covance and the onetime 60 million NASA asset sale recorded in the prior year was up 4% year over year and 3% sequentially.
Consistent with our disclosures the last two quarters. We're also providing our results excluding the impact of engine Smith.
Revenue excluding on Gen. Smith was 925 million.
Excluding the cobot impact and NASA asset sale revenue was up 5% year over year and 3% sequentially.
The defense and intelligence segment revenue increased 2% year over year, primarily driven by continued on contract growth and new program contributions, partially offset by cobot impacts and higher prior year surged volumes related background investigations.
Civilian and health care segment revenue decreased 12% year over year due to the onetime NASA asset sale, partially offset by continued ramp ups on key new programs.
Putting the asset sale revenue grew 3% versus prior year.
As a result of the momentum from new business wins over the past several quarters. We anticipate continued segment growth during the second half of F y 21.
Contract mix as a percentage of total revenue this quarter was 52% fixed price.
34% cost plus and 14% time and materials.
Q2, adjusted EBITDA was 179 million and adjusted EBITDA margin was 15.7%.
As previously discussed the anticipated year over year decline in adjusted EBITDA margin is primarily due to lower asset intensity, an increased mix of cost plus programs any 5 million cobot impact.
Excluding engine Smith, adjusted EBITDA was 149 million and adjusted EBITDA margin was 16.1%.
Cove, it impacted margins 20 basis points in the quarter.
Depreciation for the quarter declined 4 million from the prior year to 36 million again, reflecting the decreasing acid intensity of our business.
Acquisition related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS was 60 million.
Q2, adjusted net income was 86 million, resulting in adjusted diluted earnings per share of 53 cents.
Against a diluted share count of 161.9 million.
Adjusted diluted EPS includes a two cents impact from coated.
Excluding engine Smith adjusted diluted earnings per share was 40 cents.
Turning to slide six I'm extremely pleased with our free cash flow generation this quarter.
During the second quarter, we generated 164 million of cash flow from operating activities and a 134 million of adjusted free cash flow.
156% of adjusted net income.
The difference between the cash metrics is $50 million of capital expenditures, which includes finance lease payments and 20 million of separation integration and restructuring payments.
During the second quarter, we paid down 26 million of debt and returned 11 million to shareholders in the form of quarterly dividends.
As previously communicated given the cobot environment, we have temporarily halted our share repurchase program.
We exited the quarter with 966 million of total liquidity.
Including 216 million of cash and a 100% of our 750 million of available revolver capacity.
We ended the quarter with 2.5 billion of debt.
Of which 2.3 billion is flexible prepayable with no refinancing and limited repayment requirements over the next several years.
Our ending net leverage ratio was 3.2 times per our credit agreement compared to our financial Covenant maximum of 4.25 times.
In summary, we maintain a solid balance sheet substantial liquidity and strong financial flexibility.
Turning to slide seven.
We're off to a strong start to fight 21 as a result, we are raising our F Y 21 guidance metrics.
We now expect revenue.
In the range of 4.41 to 4.56 billion up from our original 4.26 to 4.41 billion.
This reflects an estimated $150 million of fourth quarter revenue associated with engine Smith contract extension, which we are still in the process of finalizing with the Navy.
Once definitive sized we will update as required.
Although the COVID-19 pandemic has not lessened and there was uncertainty regarding the duration of the continuing resolution we are maintaining our revenue guidance range excluding engine Smith.
Driven by strong performance in our business excluding engine Smith, we are increasing the low end of our adjusted EBITDA margin guidance 30 basis points to 15.3% to 16% up from 15% to 16%.
We now expect adjusted diluted EPS guidance of $2 and three to $2, an 11 cents up from $1.90 to $2.03.
Finally, we are raising our free cash flow conversion from a 100% plus to 115% plus due to the strong performance of the underlying business and our continued focus on driving free cash flow.
Excluding the estimated impact of engine Smith.
We expect revenue for the year to be 3.66 to 3.81 billion.
Adjusted EBITDA margin of 15.8% to 16.5%.
Adjusted diluted earnings per share of $1.65 to $1.73 cents.
And adjusted free cash flow conversion of 115% plus.
Well the pandemic remains a fluid situation that we continually evaluate from a business perspective, we are maintaining our original assumption for covered in our guidance of 75 million in revenue.
20 million and adjusted EBITDA.
Lastly, we assume an effective tax rate of 25% as we continue to drive tax planning initiatives.
Excluding engine Smith, we continue to anticipate year over year revenue growth in the second half of F y 21.
While we expect Q3 seasonal headwinds, we anticipate second half revenue to accelerate as we exit the year benefiting from new business ramp ups and fewer headwinds moving forward.
In conclusion, we delivered a strong first half of that for 21 and remain confident that our robust pipeline new program wins and solid book to Bill have us well positioned to achieve both our short and long term targets.
Operator, we're now ready to take any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and he would like to withdraw. Your question. Please press Star then two please limit your inquiries to one question and one follow up at this.
Time, we will pause momentarily to assemble our roster.
Our first question comes from Joseph Denardi with Stifel. Please go ahead.
Thanks, Good evening, everybody, Matt you guys are sitting on a one six book to Bill X and Jan the revenue guidance. Excluding Amgen applies you know call it 4% organic growth in the back half of the year I know you don't like to talk about.
Quarterly revenue and I'm, hoping you can address this because I think it's important for investors or should we assume growth in the third quarter is more subdued and then you see stronger growth in the fourth quarter and that should be a good run rate into into next year is that a fair way to think about it.
I think that's exactly right Joe that's a fair way to think about it so I'm not sure I can give you any other comment because you've got nailed that just John any comments no. That's a you Joe you're reading it right again very very pleased with the business development performance and that trailing 12 month book to Bill you're going to see as I said in my prepared remarks.
Obviously as we're exiting the year, we're going to be on that course and speed. So that's spot on okay, great and then Mac.
Maybe you do want to talk about this a was going to say I imagine you don't but given your the end of your prepared remarks, maybe you do the Bloomberg headlines yesterday, yeah as a public company I think the business is always technically for sale, but has anything changed of late in terms of you all start.
On a more formal process in that regard can you just provide us kind of your perspective on that thank you.
Yeah, Joe listen I can't comment on market speculation like you got from Bloomberg.
Public company, we're always evaluating ways to drive shareholder value now our principal focus is to run the business deliver on the customer mission to take care of employees and in meantime, driving shareholder value. So that's that's all I can comment on that.
Okay. Thank you.
Thanks, Joe.
Our next question comes from got them caught up with Cowen. Please go ahead.
Yes. Thank you I was wondering if you could comment on where we are on the engine or.
Protest you.
Process, when we expect a definitive answer.
And when do you expect that the extension award.
So to give them that this is Matt that's a good question. So here's where we are just a little color little background. As you know we took our protests the court of federal claims because we didn't feel we quite got the answer we need to understand exactly what happened why we lost.
You might do that process and so here's where we are the and everybody's filed all the papers a stellar protective order. So I can't go in any detail, but the oral arguments are scheduled for November 13th.
And and again everything is under protective order and the expectation is that by the end of November early December you'll have a summary judgment of what if any corrective action by the court of Federal claims recommends. Okay. So that's part one got the second part is as you know we've got the contract to the end.
Just.
And the Navy's come back to Us and said, okay, Here's what we'd like for you sole source extension, a and a couple of parts. One. It would go first of January through June and then it would provide them with three one month option. So I'd be obviously July August and September. So that's about where we are you in the meantime bought them. We're supporting the customer every day and do what we need.
To do so does that give you what you're looking for.
Absolutely and just to be clear is the transition still going to be up about nine months or do you think it will be expedited to like six months I can't comment on that I think that's the <unk> actually I don't know the answer to that got them to kind of where do you have I think thats kind of what the Navy's thinking about I suspect that will become clear.
Here as we get into the new year. Once this watch this extension is codified inside we'll get a better idea I suspect we'll have a better idea next time, we speak to you all you know quarterly call, but I have no idea okay.
Okay.
Another question I had was if you could just it looks like a big bookings quarter and I know that deals thing was we awarded the G.D. So did you guys maybe disclosed the outstanding bids as of now or maybe you know maybe adjusted for de US as of the end of the quarter.
Well, yes, let me let me address the US first okay. Because I think that's a reasonable reasonable question and then I'm not going to go into too much detail on the pipeline, but let me just kind of tell you whats kind of whats going on with that so so the d. US as you know was a bid we put in I guess, probably three or four months as fast first thats that will.
Certainly we.
We came out as you know first of June and I think we that bid was done before the end of the county I believe so it's been a long time in the making and and so we're certainly disappointed with your original decision. It was a really frustrating acquisition process I certainly will go into detail very frustrating. So we ended up having to protest.
Because we didn't understand again, that's our that's our right and due process and so this last protests has gone through a what we thought would be corrective action Ah I.
I think they came out the corrective action.
It's been decided and so here's where we are we're not and we're not going to protest again, we're moving forward. The officers in the rearview mirror, we had nothing in our guidance nothing in any of our in our Pan out it was a greenfield opportunity for us to go after as a new company frustrating as it may be frustrated was.
It's basically done and we are we are moving forward. So it's in the rearview, we've got $82 billion pipeline to prosecute were two and a half years older than we were then and so we're excited about the prospects of that's driving the business forward. So that's kind of where we are golf Im. So excited about this big pipeline excited about the fact that we've got very.
Little in re compete over the next two three years. So the pipeline is all about new business. So that's kind of where we are.
Thank you and one last one if I may.
Could you could you guys remind us of the headwinds that we faced either sequentially or year over year from some of the items you've called out for example, NASA Nast you know what the year over year impact is as we enter the third quarter. What it was in the second quarter, you mentioned the $60 million.
One time sale that was or other.
Sales there and then.
Background investigations and whatever else that are sort of the known headwinds.
How those change as we move into Q3 versus what they were in Q2.
Anyway, they got them, John John I'm happy to address that so as we have previously message when I take a look at year over year, when you're kind of looking at Q3 again. The prior year. You know, we're very successfully had been addressing a the b I volume surge, we've talked about we had a steady steady state in Q.
For so we got one more quarter to overcome on that and then obviously you know with the covert environment right and the Fluidness. There. So I would say those are the kind of remaining headwinds as you take a look at the next quarter when.
When you think about it sequentially, we've got a couple of additional holidays and our Q3, you typically see a little bit of an uptick with P.T.O. usage around those holidays, but again, we've got a lot of really good tailwinds to right. We talked about the trailing 12 month 1.6 times book to Bill Excluding engine Smith, Oh by the way.
57% is no.
We continue to ramp up some of those very solid.
Solid new business wins, specifically aimed to us and some of the classified wins. So again big picture here, there's certainly more tailwinds and headwinds, but wanted to give you a little bit of flavor of some of those headwinds as we're going through this year.
Thank you very much guys.
Sure.
Our next question comes from Louie Dipalma with William Blair. Please go ahead.
[noise], Matt John and Michael Good evening.
Good evening, David Lloyd.
Space missile defense is considered one of the highest strategic priorities can you elaborate upon what services, you're providing for the space development agency for that missile tracking layer program that you referenced in the prepared remarks and now it seems to be a pretty landmark.
Program with Spacex and L. Three Harris, though related to this are there. Many similar types of you know these space engineering like systems integration.
Contracts you know in your the 82 billion dollar pipeline that you also referenced.
Yeah. That's a good question, let me let me first address the first part of your question.
So so yeah. We're excited about that and you know I don't go of all the gory details, but you know part of the pedigree of what is now perspective, it's all about GE aerospace in Valley Forge and they were kind of in the leader and do Lockheed Martin.
It does on the first national space system. So it is on our DNA it isn't a legacy but I'd say, we're really excited about the the space development agency really embracing modeled based systems engineering systems Engineering, agile Dev ops and those guys. Thanks, and that's really what this is something that's a little bit and get a little greater blocks I cant control.
Got a detail let me, but it is really about providing mission systems engineering and integration support as they talk about some of the on orbit testing and experiment. So I mean this is real systems engineering, you know real platforms real stuff. So so yeah, we targeted that because it isn't a legacy isn't a hair.
As in this company and so we're building this pipeline and frankly lower you know we talked about the whole notion of systems integration and as you know.
Thinking about this big pipeline, what we've talked about is about 20% of these opportunities are in that in that vein of the you know it's not actually not so much anymore. It's really modeled based system engineering, which is which is important but we're also seeing that across government low is not just in the Intel.
Its community or in kind of the space business, we're seeing the advent of that across agencies like homeland security, where they need they've got very complex programs.
And and multiple programs and this is a good way to help them get the data visualization they need to make a decision to see where they are so they start to go to I see initial operating capability. So so it's a it's been a good business, we're seeing it leverages self across we like being in the space business, we like being one of the first pro.
Grams, and Sta, and so there's a burgeoning pipeline as an organization get stood up and so excited about being there first and excited about continuing to grow there.
Thanks, Matt that's all I have another very helpful.
Right.
Our next question comes from Gavin Parsons with Goldman Sachs. Please go ahead.
Good evening.
David I guess.
Hi, guys on the the fiscal 22 to 24 can afford a 6% organic growth rate targets no. Obviously, a a lot of moving pieces right now with a new administration and the cobot impact driving up Oh fiscal deficit, but curious if you had an underlying assumption for your budget or addressable market growth rate and if you have any initial thoughts on.
How that might be evolving.
Yeah, Let me, let me talk about at least what we can see today, which as you know November 10th with regards to what budgets May then as you you kind of gave the preamble Gavin there are a lot of moving parts, but I think you know we spent a fair amount of time looking at the what if situation scenarios, because that's John and I, Michael that's our responsibility so I.
I think when I, if you look at the New administration and other kind of handicap that at least a little bit I know, there's a lot we have not show a whole lot, but I think what we have seen in our in our research is it doesn't from the D. Kinda Slash Intel budget, we haven't seen a lot of anything that's going to be draconian I think you know even if had been they exist.
Thing administration and have been somewhat flat and that's a pretty big budget right and you may see it vacillate, a little I think surveying budgets, we're kind of seeing that kind of staying where they are so it's hard to tell I think this the Senate run off is going to have a bit of an impact I think the question about that so we're kind of looking at all that my ears.
Point, we're not platform, we're not a platform company I do believe when you get out you know I think there's going to be a kind of a national defense kind of relook, particularly with Congressman Adam Smith in Washington, Who's got some strong opinion about what it may or may not be fundamentally we're kind of we've talked about this before if the budget goes from 700.
140 million. The 40 vein is whether you're gonna Bob F 30, fives or a few more carries or whatever we're kind of below that and if you will and so when we look at kind of where we are doing what we do.
And in the digital transformation cloud migration application modernization cyber security the tools Weve talked about for Fiveg analytics, we feel pretty good about where we are so we got the right capabilities. The right customer set and we're close to that mission, we've talked about that being involved with alcohol, whether it's just having student financial.
Laid or making sure I'm on the government doesn't spend billions and on unwarranted Medicare Medicaid claims so I kind of close to that very close to the flagpole, obviously in the intelligence in DMD as well so it's hard to predict I, probably not answering your question, but it's the way we view. It you know our business is about 50 545 55.
Defense it into maybe a little bit more 40 to 45 in and surveying so well that high spread right customers right capability. So time will tell I guess is really simple answer with regard to do though I think it's going to take the likelihood of the new administration getting your EPS was 21 budget out in February March not likely to happen right well be.
Want to see our at least through the first calendar year I think but then you'll start to see the flavor of whats going to happen with with their with their with their appropriation bills you know going into the government fiscal year 21. So that's not a rambling dissertation on a lot of a point some nonspecific, but that's the best way to John anything you want to add to that I know and the only thing I would.
That as evidenced by our results excluding engine Smith, we have a underlying strong healthy growing business that is supported by the you know the trailing 12 month book to Bill that we've talked about a number of times in this call, which was 1.6 times and 57% now so we feel very good about them.
No we feel very good about we're positioned in the marketplace and we're excited about the future.
Yes, that's really helpful insight, so if I could tie that back to the 4% to 6% then is it safe to say you believe you could achieve that kind of almost no matter what the budget does.
I think as far as we can see today Gavin you know they they opt is based on what I said, what we believe and you know things change, we know that but to answer your question. What we see today, what I stated what we believe yes. The answer is yes.
Great and then John just a question on the free cash flow conversion.
Just bridging kind of the strength this year and last year to guidance, but just implies a a big step down in the back half and then implies another step down to get to that the longer term, 100% conversion. So just hoping hoping you could help bridge that and then comment on whether or not that's just more conservative than anything.
Yeah, So sure I'm happy to do so as I again said in my prepared remarks, we're very pleased with the free cash flow generation. When you take a look at US we're industry, leading relative to yield conversion, yes. So just absolute solid working capital management every single quarter Alright. So again right now is the result.
After that we did increase it to 115% plus okay. We feel good about what we're doing we're maniacal balking about cash collections and we're going to continue to drive. This so again feel good about what we performed and feel good about you know how weve guided at this point in time, we're going to continue to drive this hard.
Can you grow your absolute free cash flow dollars this year versus last year.
You know weve given you the projection right now.
115% plus of Eni, Okay. So that suggests in the area of about 400 ish million dollars plus or minus of adjusted free cash flow. So again, what you should take away is again, we're a cash machine. We're very focused here do a nice job with solid working capital management and we're going to continue to drive this.
Okay, great. Thanks for all that.
Sure.
Our next as a reminder, if you have a question. Please press Star then one back to the question queue. Our next question comes from Joseph Denardi with Stifel. Please go ahead.
Thanks, Sorry, just two quick ones maybe for me John just on the on the indirect cost benefit from from as a result of Cove. It you know just given the nature of your contract mix you may be able to retain more of that than some of your peers. So do you see a benefit going forward.
Worked from home and and then some of the other cost savings that are that you're seeing from this or is that more rounding error.
Yeah, it's it's really more the rounding error, obviously, we've benefited a little bit from obviously lower amount of travel entertainment discretionary type of expenses.
But you know at the end of the day when you take a look at our contract mix you know we've done obviously pretty good job with Oh, returning people to work doing a very responsibly, we've done a very good job relative to continue executing perform on our programs as evidenced again by the you know margin.
[noise] improvement.
You know we've done a very nice job on on facilities rationalization, which we've talked about you know weve effectively runoff.
Well, you know reduced our square footage by about 700000 square feet in.
In this in this fiscal year.
As a result of us being able to obviously better work virtually.
So that's going to pay some some good dividends for us moving forward. So it's really in the rounding but you know we're very pleased with the progress we've made and the results that were delivering right now Joe. Okay. And then you have your capital leases running off pretty sharply over the next few years is that a function of the contracts that.
I have not been retained over the past couple of years or will that naturally be kind of filled back in as you win additional work I mean do you expect.
Finance lease payments to actually come down as their disclosed or will that start to be back filled as you win new business. Thank you.
Yeah. Good question right now we do expect it to come down we continue to succeed you know successfully shift to the cloud okay. In some of our again more legacy asset intensive jobs are starting the waterfall down so you.
It will probably be three.
3% to 3.5% of revenue Capex of revenue this year and they'll continue to come down over the next 12 to 24 months show [noise].
Great. Thank you very much.
Sure.
This concludes our question and answer session I'd like to turn the conference back over to Michael P.C. for any closing remarks.
Thank you for joining us today and for your interest in perspective, and we look forward to speaking you with you again next quarter stay safe. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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