Q1 2021 Leidos Holdings Inc Earnings Call
Greetings and welcome to the light on first quarter 2021 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation and the interest of time and Sheila as many as possible to ask questions. Please limit yourself to one question at that time, you may return to the queue for additional questions as time allows.
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Please note on this conference is being recorded.
I will now turn the call over to Peter Berl Investor Relations Peter you may begin.
Thank you, Rob and good morning, everyone I'd like to welcome you to our first quarter 2021 earnings conference call.
Joining me today on Roger Krone, our chairman and CEO, Jim Reagan, our Chief Financial Officer, and other members of the lightest management team today.
Today, we will discuss our results for the quarter ending April 2nd 2021 Roger.
Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company's strategy.
Jim will follow with a discussion of our financial performance and our guidance expectations.
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 and that's we currently see it and as such does include risks and uncertainties. Please.
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 will discuss GAAP and non-GAAP financial measures a reconciliation between the two is included in the press release that we issued this morning and is also available on the presentation slides the press release and presentation as well as the supplementary financial information file are provided on the Investor Relations section of our website at IR.
And that lighthouse dot com with that I'll turn the call over to Roger Krone.
Thank you Peter and thank you all for joining US this morning for our first quarter 2020 One earnings conference call.
As we communicated in our press release. This morning, I'm pleased to announce that Chris Cage will be light OS is next chief Financial Officer later this year.
Chris will succeed Jim Reagan, who has chosen to retire falling on a long and distinguished career in particular, the last six years as my good friend and business partner.
A few remarks on this transition before I hand, the call over to Jim, but first let's jump into the quarter first quarter results reflect the perseverance focus and tremendous execution of our employees and business partners.
New quarterly record levels of revenue non-GAAP, EPS and backlog were achieved and significant organic growth was delivered across all business segments.
This early momentum favorably positions <unk> to deliver on our full year financial commitments.
Revenues for the quarter were $3 $3 billion up 14.7% from the prior year and.
And up 9% organically underscoring our accelerated recovery from last year's pandemic headwinds and the early ramp of new business wins and.
Adjusted EBITDA margin of 11.7% up 240 basis points compared to the prior year period reflect strong program performance and the resolution of a longstanding MSA legal matter, which together delivered 45 per cent grew.
Both on non-GAAP EPS of $1.73 for the quarter.
Net bookings of $3.8 billion resulted in a book to Bill of 1.2 times and 1.3 times on a trailing 12 month basis.
This increase driven by success in both our solutions and health segments.
Bush a record backlog up $32.6 billion for a 13th consecutive quarter.
Providing greater clarity and confidence and near term revenue growth expectations.
I will now touch on a few of the major wins, we received from the corner that underpin our growth and backlog.
And the health segment. The company was awarded a new pie and prime contract to provide non medical counseling to military service members and their families through the military and family life counseling program known as inflict.
This important work will be conducted at approximately 100 U S military installations or nearby and civilian communities.
We currently estimate revenues will be approximately a $1 billion over the potential seven year life of the program.
This new award is especially timely with may being mental health awareness month.
Military members and their families experience unique stresses and these include fears for the safety of the service member and.
And feeling anxious or overwhelmed by deployment related challenges and responsibilities.
Nearly one in four active duty service members show signs of mental health condition.
Children of service members are especially vulnerable one third of children with a deployed parent have psychological challenges such as depression anxiety and behavior disorders through our work on the inflict program, we provide confidential counseling to alleviate stresses and.
Military members and their families and ability to cope with these challenges.
Cancel or is aimed to prevent the escalation of stress into harmful conditions.
About a quarter of our employees are veterans and so this program is meaningful to us on many levels.
Next and the civil segment.
The company was awarded a prime contract by U S customs and border protection.
Provide multi and energy portal systems for noninterest ship inspection of commercial vehicles at land and sea ports of entry.
Under the contract <unk> will integrate deploy and train C. B P staff to use of tobaccos.
M P with low energy Backscatter and high energy transmission cargo inspection system.
The multiple award I D. IQ contract has a total value of $480 million and a five year base period of performance and options up to 10 years if exercise.
And then the defense solutions segment. The company was awarded a prime contract by the Naval Undersea warfare Center to provide engineering technical and management services for the Naval array technical support center on Idose.
And will be responsible for production engineering technical and logistics support and the U S Navy and foreign governments towed array assets. This single award <unk> contract and as a total estimated value of $149 million.
Finally, the company was awarded contracts valued at $822 million. If all options are exercised by U S National security and intelligence clients. So the specific nature of many of these contracts is class.
And so fine they all encompass mission critical services that help to counter global threats and strengthen national security.
Turning now to several notable accomplishments and events that took place in the quarter.
We closed the 19 O One group acquisition in January and as anticipated the business is being levered across all of our business segments.
And both the performance of backlog programs and new program bids.
And the inclusion of 19 O one groups cloud based solutions and fully integrated service delivery platform will enhance performance on our customers' important missions and continue to differentiate light OS is value proposition across our defense intelligence Civil and health markets we serve.
Furthermore, as we shared with you on the February call that Gibbs and Cox acquisition is nearing completion with yesterday's exploration of the HSR waiting period.
With that gates cleared we now expect the deal to close later in this month.
Also I went and take a moment to highlight the ongoing significant progress with the D. O D healthcare management systems modernization program, otherwise known as Jim some.
The MHS Genesis electronic health record system is now 30% deployed and is currently live and operational at more than 42 military treatment facility commands across the country with nearly 41000 active users.
Notably during this unprecedented global health care crisis, the system and has provided advanced capabilities to support clinicians and and buys and providers, including 24 by seven access to medical and dental records and effectively tracking COVID-19 cases and mass.
<unk> since its initial award their program has been expanded to include the United States Coast Guard and the National Guard and reserve, we remain on schedule to deliver MHS Genesis by the end of calendar year, 2020 three.
Shifting to the macro environment.
While we are still awaiting the release of the President's 2020 two detailed budget request and subsequent multi year defense projections. We are encouraged by last month's release of the high level budget request.
While the recommended defense funding level was in line with our expectations, our innovative technology and strategic investments remain squarely aligned with the administration's prioritization of certain critical need areas, such as digital modernization cyber security autonomy and hypersonic.
Additionally, we are very pleased with the proposed 16% increase and nondefense discretionary funding.
This proposed growth supports the value proposition of our diverse business portfolio, which extends beyond defense and intelligence into the federal health and civil markets, including ports borders and airport security.
And while a continuing resolution in the fall is feeling like a near certainty. The typical annual disruptions may be muted given the no growth request for defense and the reality that under a CR agencies generally continued to receive stopgap funding in line with prior year.
Ears appropriation levels.
With nearly six trillion dollars of congressional and approved relief and stimulus funding funding since the start of the pandemic and our pending two trillion dollar infrastructure request, we believe there could be additional opportunities for light us, particularly and.
And our civil segment.
Areas of interest include airport, and FAA upgrades as well and Civil Agency research and development. However, we will need to see the final details when they become available to better understand what is truly addressable over the multi year infrastructure plan.
With regard to the administration's decision to withdraw all troops from Afghanistan by early September.
<unk> has been directed to leave the region within the same timeline.
We currently estimate the revenue impact to be less than 1% of our defense solutions segment's current year revenue.
While the program level customer discussions are still evolving our best estimates have been incorporated into the guidance that Jim will cover later in the call.
And as we recently marked the one year milestone of this devastating pandemic at the end of Q1 I want to provide you with another update on our lightest relief Foundation and now it has been assisting lightest employees, who have been impacted by the virus since March of 2020.
The fund has raised and distributed over $1.7 million through generous personal donations from employees and members of the executive team and the board of directors, including company match contributions with those funds over 500 Litres families.
And who have suffered a COVID-19, and hardship or loss of a loved one and received financial assistance and the ongoing generosity of our colleagues is inspiring and a constant reminder of our share values no matter the challenge.
Finally, as I noted at the top of the call.
I will close my prepared remarks with a few comments on the upcoming CFO transition here at light us.
On behalf of our board of Directors and management team I want to thank Jim for his countless contributions to this company and wish him all the best and his planned retirement.
Jim joined US six years ago, and has been my steadfast adviser and business partner.
And Jim and his team has grown the business over 160%.
Build and investment grade balance sheet and delivered significant total shareholder return, while James James contributions were critical and strategic planning and M&A deal structuring for key transactions.
Value creation takes place in successful business transformations, and building and nurturing culture and talent and that is where Jim made the biggest impact for our employees our customers and our shareholders.
Thank you Jim However, I will save my goodbye since you'll be cash continuing to be and adviser through year end.
Meanwhile, I'm pleased to share that our board of directors has elected Chris Cage and as our next Chief Financial Officer effective July <unk> of this year, the beginning of our third quarter.
Chris is a great example of the talent development and succession planning process here at light us.
Chris joined our company and 1999 and many of you have had a chance to interact with him over the last several years and she has held a series of financial leadership roles with increasing responsibility. Most recently as our Chief accounting Officer.
His financial experience and deep understanding of our business has prepared him and therefore, our company for continued success.
Since its May force before I turn the call over to Jim I, just wanted to say May force be with you.
I will now turn the call over to Jim Reagan for more details on our first quarter results and guidance.
Thank you Roger for those kind words, and thanks to everyone for joining us on the call today upon reflection and I've had a very fulfilling career and these past six years here of light as have been truly special on account of all the passionate and brilliant people who work here.
Deeply value the relationships that we've built and the accomplishments that we have achieved together.
Have great confidence and Chris's ability to lead the finance organization and I look forward to working with him on a seamless transition.
With that I'll start by providing an overview of our first quarter 'twenty one 2021 results followed by an update to the 2021 guidance.
We are pleased with our strong start and growth momentum through the first quarter of 2021.
First quarter revenue grew 14, 7% over the prior year quarter and 8.9% organically.
The increase in revenue was driven by the dynamics S. DNA and 19 O One group acquisitions.
Growing on our existing growth on our existing programs and increased contribution from new programs.
This solid start to the year aligns with our fourth quarter messaging and showcases our resilient and program execution fundamentals with all segments delivering double digit top line growth.
Adjusted EBITDA margins of 11, 7% grew 240 basis points over the prior year quarter.
The increase was driven by program performance and mix and continued indirect cost management as well as the benefit from the successful settlement of the M. S. A legal matter.
Excluding the positive impact of this $26 million legal reserve adjustment adjusted EBITDA margins would've been approximately 11%.
First quarter non-GAAP diluted EPS of $1 73 grew 54 cents over the prior year quarter, driven by strong execution and organic growth as well as the settlement of the MSA legal matter.
Without the settlement.
Non-GAAP diluted EPS would have been a dollar and 59 cents, reflecting 34% growth year over year.
Operating cash flows for the quarter were $239 million.
Excluding the net proceeds from the accounts receivable monetization facility.
Operating cash flows would have been approximately $145 million.
The decision to utilize the facility enabled us to buy back approximately $100 million of light of stock on the open market during the quarter, which aligns with our long term balanced capital allocation strategy.
Which consists of being appropriately levered and maintaining our investment grade rating.
And returning our quarterly dividend to our shareholders.
Reinvesting for growth with both organically and Inorganically and returning excess cash to shareholders and a tax efficient manner.
Additionally, first quarter operating cash flow does not reflect any net cash benefit from the MSA settlement, which is expected to be realized and the second quarter.
Bookings of $3 $8 billion were strong across all segments, resulting in a 1.2 times consolidated book to Bill and record ending backlog of $32 6 billion.
This represents 15% growth and backlog from the first quarter of 2020.
Now for an overview of our segment results.
Defense solutions revenue increased 14, 8% over the year on year over year and 9.2% organically.
Driving this strong growth was the dynamics acquisition, the diligent execution of new programs, such as the C. B P traveler processing and vetting software system and growth on existing programs.
As a reminder, consistent with our policy dynamics revenue will now be included in our organic revenue calculations. Since we owned the business for a full year effective February 2020 one.
Defense solutions non-GAAP operating margins of nine 2% increased 240 basis points from the prior year period, reflecting.
Strong program growth on certain contracts reduced indirect expenditures and the recovery of a previously reserved international and receivable.
Defense solutions book to nearly 2 billion and net awards for the quarter, resulting in a book to Bill of 1.0 X and 1.3 acts on a trailing 12 month basis.
And our civil segment revenues grew 17, 1% from the prior year quarter and 6.1% organically.
This growth was driven by the S DNA acquisition and volume growth on our existing programs.
Non-GAAP operating margins and the civil segment grew 110 basis points year over year, driven by the net benefit from the M. S. A legal reserve adjustment, partially offset by lower margins on certain programs.
Civil recorded approximately $700 million and net bookings for the quarter, resulting in a 0.9 times book to Bill and 1.1 times on a trailing 12 month basis.
And finally, turning to our health segment.
Health segment revenues increased 11, 5% over the prior year quarter on both a growth and organic basis.
This growth was driven by increased volumes on existing programs, including the continued backlog and backlog burn down and our medical exam business and timing of wave and deployments on the dim sum contract.
<unk> segment non-GAAP operating margins were strong at 18.6% and increase of 310 basis points over the prior year quarter, reflecting increased volume and growth on programs with our V. A and D O D customers and reduced business investments on a commercial venture.
We expect elevated levels of non-GAAP operating margin to continue through the first half of 2021 and returned to normalized segment levels starting in the third quarter.
The health segment booked over $1 2 billion net awards driven by the successful win of the military and family life counseling contract, which resulted in a book to Bill of 2.1 times for the quarter and 1.6 on a trailing 12 month basis.
Before I turn to guidance I wanted to give you a quick update on the 7.7 billion dollar Navy and Gen program.
Transition and on boarding are going well, but due to the late fourth quarter resolution and the courts. The pace of the ramp was lighter and the first quarter.
We expect the ramp to pick up considerably over the next two quarters, giving us confidence and the organic contribution and both this year and next as outlined in last quarter's earnings call.
Moving now to the remainder of the year.
We are increasing our guidance for adjusted EBITDA margin, non-GAAP, EPS and operating cash flow to account for two distinct items.
The settlement of the MSA legal matter and the reduced share count, resulting from our share repurchase during the quarter.
Our guidance does not reflect the announced acquisition of Gibbs and Cox.
And as we've done in the past, we will provide an update and our next quarterly earnings call. After the deal has closed.
Our guidance range for revenue remains unchanged, we expect to deliver between $13 7 billion and $14 1 billion of revenue for the quarter and for the year.
We expect adjusted EBITDA margins for the year between 10, 5% and 10, 7% a 20 basis point increase at the midpoint from the previous guidance, reflecting the benefit from the M. S. A legal matter.
As a result of the $100 million share repurchase executed and the first quarter and the net gain from the MSA legal matter, we are increasing our non-GAAP EPS guidance by <unk> 20 cents.
To a range of $6 35 to $6.65 on the basis of 143 million shares outstanding.
And finally to account for the expected net proceeds from the MSA legal matter, we are increasing our operating cash flow guidance by 25 million to at or above $875 million for the year.
And this updated guidance assumes no full year contribution from the accounts receivable monetization facility and with that I'll turn the call over to Rob. So we can take some questions.
Thank you at this time on that will be conducting a question and answer session.
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One moment, please while we poll for questions.
Yeah.
Yeah.
Thank you and our first question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Thank you very much good morning, Roger and Jim and congratulations on your retirement income.
Good morning, Sheila.
Morning, maybe just because he spent a few minutes on your prepared remarks talking about this Roger and obviously Theres an acquisition. This morning from one of your competitors can you talk about you know your health Division, how do you expect revenue growth to kind of work through with them. Some 30% implemented at the moment are deployed and just bigger pick.
Sure in terms of the health market, how do you see it evolving whether the growth or just competitive nature of it.
Well, let's see on.
On dim sum will be at our current revenue letter level or higher for another couple of years and Sheila as you know our health group has traditionally been our highest margin and our highest growth area and it's not surprising to us.
And that others have seen in the market as attractive as we have and.
The interesting thing about the health market as it's always been highly competitive and whether it's you know one of our competitors getting into one of our traditional businesses.
Just changing the name of the competitor and it is a very much a commercial world.
And now we see.
Biden administration may be the human infrastructure Bill as it comes to pass is continuing to increase the spend and we think it raises the importance of agencies like CMS and social security and and that's going to attract maybe some new competitors and maybe some non traditional competitors, which.
And our strategic view of the market, we have always expected and we believe we are successful and that market because we offer a value added service to our customers and we are if you will sharpening our tools and getting ready for what we think.
B and significant growth and the top line and the market overall.
Thank you.
Yeah.
Our next question is coming from the line of Robert Spingarn with Credit Suisse. Please proceed with your question.
Hi, good morning, and and congrats Jim Best wishes ahead.
Thanks, Rob.
On the defense margins, they were sequentially up and above the level you'd achieved previously and any quarter last year. So I wanted to talk a little bit more about the drivers you did touch on that you talked about mix et cetera, but and and just whether COVID-19 related margin pressure is easing there and if you can quantify the impact of the of the international receiver.
There yeah.
And <unk>.
And with the last one and think of the recovery on the international receivable is you know $2 million to $3 million or so I think more fundamentally the business has performed well.
And on an execution basis.
Yeah companies with portfolios of our size always have a program or two that are not making their planned margins, but the execution and the defense groups been going pretty well, including the.
Strong management of indirect cost, which.
He has also been something that's provided them with a live now that said.
You know, we do have and R&D budget that we underspent.
And just spent a bit in the fourth quarter and and we expect that the level of R&D spending to tick up a bit through the balance of the year and and that's important for our long term strategic priorities that are going to grow the business at strong levels going forward.
Last thing that I would say is that there there's and.
As we as we think about the margin and defense for the rest of the year, it's going to continue to be strong but.
I don't think you should necessarily be thinking of that the Q1 level as being something that youll see every quarter for the rest of the year.
Jim is that the case and all of the segments you touched on this earlier that the second half is just a little bit lighter because the first quarter or first half was elevated is that all three segments.
Well, you know and in health, we've got yeah, we've got the backlog burn down that we talked about debt because of the way the operating leverage in that segment works.
The margins are going to be a little higher than normal through the second quarter of the year those margins will tamped down a bit and the backend, but you know.
And unless we find that health care costs are lower than we expect and if if we find that you know the our ability to generate proposals is more efficient somehow than we're currently modeling I think that you can expect the margins to be a little bit lower and the back end of the year.
Okay and that is across the board, yes, yeah. Thank you very much sure.
Our next question is from the line of Cai von <unk> with Cowen. Please proceed with your question.
Thank you very much so.
Could you comment a little bit on me.
And off of the backlog from a medical exams and the health area and what that means going forward and then somewhat relatedly. Roger you talked from the 16% increase and the FY 'twenty two fed civil budgets.
Talk about opportunities you see there thanks, so much.
Let me start with the backlog so just for everyone on the line.
We do medical exams for those.
People, who are looking for a disability benefit.
Our largest customers the VA, but we do them across the board and during COVID-19.
There was a period of time, we were shut down and a period of time that our.
Our efficiency was diminished because of social distancing and so there is a inventory our backlog of people who want these exams and it grew pretty much through last year to really for us and all time high.
Our commitment has been to work literally nights and weekends to overstaff, our clinics to work off the backlog and we're benefiting in this quarter by that although we did have some weather and Texas and other states that tamped, our quarter down just a little bit.
But if we think it will take us into the third quarter before we get back to a normal run rate and that's our best estimate today and we look at that debt while the team looks at it every day I look at it Jim and I look at it on a weekly basis, and we look at it by region and by type of exam, but we're making good progress.
The backlog is as significant and and we think it's probably going to affect third quarter as well and this is all positive by the way as it was severely negative a year ago, and we talked through that.
A year ago as as we think about the increase and the budget.
And about all we know at this point Cai is what agencies look like Theyre getting the increase and you know we're all waiting for the P. B to come out but it does look like these are agencies.
Agency for which we have a significant presence and significant heritage contract. So it's you know it's it's it's civil infrastructure and it's also some health.
I mentioned in my prepared remarks, there's going to be ports and borders and airports are FAA infrastructure those seem to be a prime theres, probably going to be some roads and bridges, which is not really all that relevant to us. We think there may be some smart cities smart highways and we do have some can't.
Traction with department of transportation. So we may benefit there, but the details are yet to be revealed and when were on the call next quarter. We will have the budget and we'll be able to address those better than but thanks for your question Kai.
Thank you.
Our next question is from the line of Gavin Parsons with Goldman Sachs. Please proceed with your question.
Hey, good morning, good morning Gavin.
Congrats to both Jim and Chris Thank.
Thank you.
And wanted to follow up just a bit on cash question there.
16% and this will request number off and that gets revised but and it does seem like there's more appetite and D. C for raising on defense budgets, maybe than there had been on the last few years. So I just share your thoughts on kind of whether that growth rate and the mid teens or and even double digits is actually realistic and what.
And what the request messages for the multi year offensive budget outlook.
And I, you know Gavin and it's really hard to handicap the.
And the most.
Most watched sport and the National capital region, which is our political process.
I think theyre going to go to a conference I don't think they're going to try reconciliation, but they could.
And if you know senator imagine from West Virginia.
It has some influence I think they'll come down a little bit and defense may go up.
There are some politicians that we talk to who say, it's you know assume it's sequester and its a tit for tat. So if you're gonna take civil up you have to take defense up.
And I don't think that's exactly where we're going to land I think we're probably going to have a higher growth number on civil and defense and by the way the defense number depending upon whether you call. It seven and $4 $7 15, or 753 does include the pay raise and I know <unk> and the base budget. So if you look at it from that standpoint.
Overall, you can say has some downward pressure in the areas that we compete.
We view is just generally flat.
We are though I think when the dust settles and we and we get through the share and we got a bill are expecting.
Maybe a high single low double digit increase on the civil side and.
And that's going to benefit our our health and our civil group and we've already as you would expect put teams together to try to anticipate where those funds are going to be spent and to make sure that we're doing the prep work to get ready to.
Provide customers value on programs that theyre going to come forward with we actually think cyber security is a good area for US. We think DHS is what's called the <unk>, which is their cyber security office, which tends to deal with cyber security and the dotcom space, we expect them both to get money and the <unk>.
This bill and money and the infrastructure Bill So cyber security overall, it looks like a good place to be thanks, Kevin.
Okay.
Our next question.
And from the line of Tobey Sommer with true of Securities. Please proceed with your question.
Thank you.
Over the last handful of years or so customers have been a little bit more willing to contract using.
Methods.
To that end up being more profitable for service providers or what's your expectation for sort of a flattening of the defense budgets are meaning for the ability of that trend to continue and yield.
Profit margins for the space.
Yeah, and Tobey, let me let me.
See if I can address your comment and I'll, let Jim add is we tend to perform better.
And when that contract is either fixed price or time and materials, where frankly the risk because performance is on US and then we can invest and we can put in rps or something.
To drive more efficiency and their contract.
With something we call on cost based contracts you were kind of limited on the earnings potential and based upon the fee that we bid on the contract and with fixed price.
You know again, we are almost immediately rewarded for.
Technology and innovation on the contract.
And it's always hard to call trends and I'm not sure. We've seen you know because you know not all of the officials have even been confirmed on the Baidu and administration and I wouldn't say that we have seen a trend away from T N M and.
When you started I thought you go and talk about Otas and I would simply say otas are alive, and well and I don't see that changing.
If you and maybe this is wishful thinking I would like to see the customers go to more fixed price because I think it fix their cost. So they don't have to worry about year over year, plus shops and it gives US you know performance responsibility and then the ability to earn more over there.
And for the program, if we can drive efficiencies into the contract I don't know Jim anything you want to just to pile on and that also delivers a benefit for the customer because when when we have more latitude in how to deliver a solution as opposed to something that's prescribed and a cost type contract.
It allows us to help the customers save some money too.
And if.
If you could just provide a little bit more commentary and color on the relative size of the opportunities within the infrastructure space I think in your prepared remarks, you mentioned airports as well as research.
Yeah.
Let's say I think it's too premature to give you a number.
But for.
And for instance, you know when I said research.
We're safer healthier and more efficient through engineering and science and.
A lot of people have forgotten about our science work and so rerun the national cancer lab.
For NCI and as part of H H S. We also run the National Energy lab up and Pittsburgh.
For the department of energy and that's another great program.
And we do essentially early stage six two kind of R&D and.
And we expect certainly the energy lab, and Pittsburgh, where and the last administration and we did a lot of work around coal and how we can burn coal cleaner and more efficient.
We would expect this administration will and <unk>.
And a lot of money on on renewables and we see the the charter and the work and the National Energy Technology Lab really growing as we think about wind and solar and and hydro and.
So that that will grow and then there are a lot of other places we do work on the defense threat reduction agency and really across the board reduce and work for the army up and Fort Dietrich.
And the medical field and so.
Yeah, we don't talk a lot about it because you know there's not a big contract like Navy Nextgen and our science work, but the <unk>.
Our heritage of doing early stage scientific of work is alive and well and of course as everyone knows we were founded as the science application company.
And so we still have a fair amount of business and that early stage work.
I appreciate that thanks, yeah. Thanks Tobey.
Next question is coming from the line of Joseph de Nardi with Stifel. Please proceed with your question.
Thanks, Good morning, Hey come on.
Good morning.
Roger just on on the SBA business I think the expectation on when you all bought it was that it would be about $500 million and sales and grow at 10%. It looks like you're running about $300 million now where do you expect that run rate to be.
By the end of this year and then what are you all looking for.
On the infrastructure side to kind of give you clarity on what incremental opportunity that could provide for that business.
Let's see we obviously don't guide by you know below and we don't.
Guide by segment much less by program and so we're not going to do that now we have said that the SBA business overall has been impacted by COVID-19 and you know there's less airport traffic and so that's affected the business and more so overseas where funding is tied to the ticket surcharges. So.
Where we are going to be below our.
Our business case, when we bought the <unk> business for for this year.
That being said in the U S. A we continue to see strong activity by TSA, and customs and border patrol and buying equipment because in the U S.
The the the purchasing dollars are really not tied to volume they're tied to the federal budget and as I said in my prepared remarks, we got on award on back as we had gotten award on rail at the border, where we're bidding on upgrading adding something called <unk> at the checkpoint.
And at major airports, we actually have a prototype and demo at Dulles, If you come and visit US you will likely well if you leave from here you will go through our C. T at the checkpoint scanner at Dulles Airport.
And we would expect and some of the infrastructure dollars out of the stimulus bill could be spent on ports and borders maybe some on airport.
And we're already looking at those opportunities I'll also tell you that you'll really country by country and some countries are down there are other country opportunities that have popped up that were not in our plan.
So you know theres a its always on a mixed bag, but if you were to walk away from the call and I want everyone to know that.
Pandemic still has affected the SG&A business and where we might have expected we would be fully recovered.
At the end of this year or into next year. We think it's probably the end of 'twenty two beginning of 'twenty three before we're back to normal volume.
That's helpful and then.
Jim a lot of focus on cash flow, obviously last quarter I'm wondering if you could just provide some perspective on that.
The updated guidance for this year of 875 is that a level of operating cash that you can grow off of and in 2022, if not what are some of the headwinds you faced there. Thank you yeah absolutely.
Absolutely the change and the guide is is really as I said in their prepared remarks. The result of the expected cash coming in from the MSA settlement.
And we clearly believe that we should be moving back toward a conversion rate of about 100%.
The headwinds for this year really are the reversal of all of the tailwind we had last year and the <unk>.
And forward into 'twenty two.
On the only real change in conversion would be because of significant growth that will require the funding of working capital for receivables and think of that as being roughly the net amount of that net of payables is about you know 227 days of sales.
<unk> is the kind of the networking capital metric that we model based on.
Okay. So it would be that working capital plus the payroll tax and those would be the two primary headwinds and in 2000 and yeah that is right.
Okay.
Thank you very much sure.
Our next question is from Atlanta assessment with J P. Morgan. Please proceed with your question.
Oh, thanks, very much and good.
And congratulations Jim.
On that.
Wanted to ask about the civil segment and so if.
If we if we back out the legal settlement there on the profitability was a little bit lower than we're used to seeing and sort of what drove that and if you expect is it kind of moves back into that.
So on a low double digit range in Q2 that we saw last year.
Yes, as you know historically the civil segment has had a little bit more volatility and its operating income margin number primarily as a result of the timing of delivery of product you know out of the.
Security products business and and this year will be no exception to that.
We have some orders that are on the pipe that.
Are being built probably you will see those ship and the second half of the year and you can probably see volatility on the other and for for that that's what our forecast is telling us.
Okay.
Excellent thanks, very much alright, thank you Seth.
Next question is coming from the line of Mariana Perez Mora with Bank of America. Please proceed with your questions.
Good morning, everyone and congratulations to Jim on Grace.
Thank you very much and good morning Marianne.
My question is on SPN, eight yesterday, Raytheon and Asics.
From the TSA to expand and deployment of checked baggage screening equipment to all stay there on.
Airbus nationwide.
Can you describe what was light on small and Dod contract and also discuss comes on.
Competitive dynamics on that business.
Maryann.
It's great question the contract that you're bringing up we did not bid on it and.
That is a that was a that's a contract to support the maintenance of the checked baggage screening machines and we chose to really pursue a path of bidding on the larger contract, which is a checkpoint equipment of all kinds whether it's.
Screening machines or scanners.
Or trace detection equipment and.
We were we were concerned that to try to bid both of them could compromise our ability to get the bigger prize, which is the one we're pursuing and should hear about it sometime this month.
Yes.
And are all competitive dynamics there.
The main competitors and how high.
That's all for the last year.
Well, we currently hold a what I think is the largest contract for the maintenance of the checkpoint screening equipment and and while the TSA has has divided that up.
You know we have consistently gotten good performance ratings, and we think that we're well positioned.
And to win.
And a big piece of that work later this month.
Thank you.
Thank you. Our final question is coming from the line of David Strauss with Barclays. Please proceed with your questions.
Thanks, Good morning.
On.
Wanted to see if you can provide and update on dynamics.
It looks like the revenue run rate there just based on the disclosure around the acquired revenue was a little bit lower or is that just seasonality and then anything you can say with regard to the lunar lander and the and the <unk>.
Protests there thanks.
Well, let's see I'll start off I'll, let Jim kind of catch up on numbers first.
First of all the and the dynamics of integration and the team is going really well.
And there there are growth on a standalone basis is really eye watering.
And we.
We've integrated our <unk> innovation center into Dianetics to better cross fertilize, our technology with their technology and that is really.
Created a lot of excitement and we will see dividends of that in quarters to come and but the the performance of diabetics is really solid and they continue to win.
Programs and their relevant area and our hypersonic glide body facility is up and running.
I was down there two weeks ago three weeks ago, It's gone and classified we actually have a parts.
And that we're building and really across the board dynamics is going well I will give you a little bit of insight on H L. S. I can't give you much.
So there were.
Three bidders and two of which everybody in the country knows and us and.
And contract was given to Spacex and upon on our debrief and our review we we felt.
Debt things.
Needed a closer look and so we did file a protest and I'm not going to disclose a lot of what's in our protest. There is some stuff out on the web there was actually a a good article written out of the Washington Post that I would refer you to and I would also caution that the Washington post is owned by one of the company's debt.
It was a competitor but.
I still thought that the article was very thoughtful and is a good basis of trying to understand what's going on and the H L. S program and and because our protest is really sort of and that's not quite a lawsuit, but its certainly a dispute with a customer I just rather not comment at length on.
Protest, but they typically last about 99 days and so and a couple of months. We will we will see what comes out of the HOS program.
And in terms of the numbers.
It is our policy that we don't include pro forma pre acquisition revenues and calculating our growth rate and so we didn't include a strong growth of dianetics had on a standalone basis last year and our growth numbers now.
Now that it's it is.
We had it for a year, where all we are including it and we do expect debt on them.
And as it is a part of the defense solutions segment, we expect that to.
It shows some continued growth yeah.
Yeah into 'twenty, two 'twenty, three hey, Jim I think the question may be around yeah, we break it out and page 14 of our calculation and get back but after 12 months, we break it off and what Youre seeing the what I 80, 383 number yeah, the 83 and that's a.
Stub period don't you you don't you should not think of that as being the Q1 revenue from dynamics and so I think David what you might be seeing is just a partial period, there and it might be misleading you to think that the revenues down and dianetics. When in fact that the dynamics are still continuing to perform and what do we do close at the end of <unk>.
January a year ago. So that's early February yeah.
Yes.
I was just comparing to $83 million for one month versus kind of what it.
And your 300 million quarterly run rate the last couple of quarters.
Yeah, I think that's just a little and it's just a timing thing yeah for sure and alright, thanks very much.
<unk>.
Thank you at this time I'll turn the floor back to Peter Berl for closing remarks.
Great. Thank you Rob and thank you all for your time this morning and for your interest and light US we look forward to updating you again soon have a great day.
Yeah.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.