Q2 2021 Leidos Holdings Inc Earnings Call
Greetings and welcome to the lighthouse Q2 to 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.
On your telephone keypad as a reminder of this conference is being recorded I would now like to turn the conference over to your host Mr. Stuart Davis Senior Vice President Investor Relations. Please go ahead.
Thank you Hector and good morning, everyone I'd like to welcome you and to our second quarter fiscal year 2021 earnings conference call.
Joining me today of Roger Krone, our chairman and CEO and Chris Cage, Our Chief Financial Officer.
Today's call is being webcast on the Investor relations portion of our website, where you'll also find the earnings release and presentation slides that we'll use during today's call.
Turning to slide 2 of the presentation. Today's discussion contains forward looking statements based on the environment as we currently see it and as such does not 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 as shown on slide 3 during the call, we will discuss GAAP and non-GAAP financial measures a reconciliation between the 2 is included in today's press release and presentation slides.
With that I'll turn the call over to Roger Krone who'll begin on slide 4.
Thank you Stuart and thank you all for joining US this morning for our second quarter, 2020.1 earnings conference call.
Our results and the second quarter reflect our leadership position and the government technology market.
I am tremendously proud of the way in light of and she has responded throughout the pandemic as our employees and business partners continually delivered for our customers and shareholders.
While we remain vigilant with the recent uptick and COVID-19 cases, well idose is stronger than ever with the new quarterly record levels of revenue and backlog consistent with our industry leading organic growth.
As I look at the quarter 4 messages stand out.
First our strong financial results demonstrate that our strategy is working.
Second our business development momentum and setting the stage for future growth.
Third we are effectively deploying capital to broaden our offerings and attractive markets.
And fourth we're building and engaged and effective workforce.
I'll now drill down on each of these 4 key messages.
Number 1 our strong financial performance was highlighted by double digit organic gross and adjusted EBITDA margins above our long term target.
Revenue for the quarter were 3.4 of 5 billion of 18% from the prior year on a total basis and up 16% organically.
Adjusted EBITDA margins of 10, 4% were in line with guidance and above the long term target we established 2 years ago.
After adjusting for the 1 time gain and the second quarter of 2020 non-GAAP diluted EPS was up 37 per cent.
These results didn't just happen.
Rather they are a direct result of our strategy, we've differentiated ourselves within the market through scale, which creates a more competitive cost structure and expanded capability to take share and position and vital markets.
We've also leveraged our cost structure to make key technology investments, which further separates us from our peers.
Number 2 our business development engine continues the momentum that is driving our industry leading organic of growth.
We achieved net bookings of $3.8 billion and the quarter, representing a book to bill ratio of 1.1.
Our 14th consecutive quarter with a book to bill ratio of 1 or greater.
Our trailing 12 months book to Bill ratio is now 1 point too.
As a result total backlog at the end of the quarter stood at a record.
33, and a half a billion dollars, which was up 9% on a year over year basis.
And our health segment, we were awarded a new fixed price contract, where the ceiling value of almost a $1 billion to improve the health of military reservists before during and after deployment Andrew.
Under this contract known as the reserve health readiness program or our age RP.
We'll provide physical and mental health and dental assessments, along with laboratory and diagnostic services supported by and secure I T infrastructure and customer service call Center.
America is more than a million of reserve component personnel and stand ready to support and defend our nation when it's called upon and it's.
Which are on or to support them.
And our defense solutions segment the <unk>.
Transportation Security administration awarded US a 470 million dollar of prime contract to integrate transportation screening equipment at airports all around the country.
Based on our policy, we only booked a small initial task order in the quarter, although we expect to achieve the full value over the life of the contract.
This work is a reconfiguration of work we've been forming we've been performing for over 12 years, and we also maintain screening equipment for TSA and all U S federalized airports.
Helping GSA insurer of freedom of movement for people and Commerce is 1 of the core ways why does she is making the world safer healthier and more efficient.
Oh.
And our civil segment.
The Federal Aviation administration notified us that they have given us the initial tasking and is part of a long term extension for the continued systems integration and Sustainment and enhancement of the en route automation modernization or E ramp system the.
And he ran the system is critical for operations and the National Aerospace system and at the 'twenty Air Route traffic control centers and the Continental U S.
And we didn't book anywhere close to the $6.8 billion ceiling value, but it speaks to the confidence that the FAA has and light us.
We expect to begin the 2020, 2 government physical year, where the continuing resolution.
But customers will still be able to find work and critical niche areas.
Our positive outlook is bolstered by the level of proposal activity.
At the end of the quarter, we had 49 billion and cement outstanding of which 35 billion is new work for us.
Number 3 we're deploying capital to complete our offerings and attractive markets to spur of profitable growth.
In May we completed the acquisition of Gibbs and Cox, which brings us World class Naval architecture design and engineering services.
And he designed and 68 per cent of the Navy's current surface combatant and fleet and are truly a national asset.
This deal enhances how we viewed across the navy and opens up significant market opportunity for us.
Our strategic planning process had identified maritime as an attractive market, where we were underpenetrated.
And to enable synergies, especially around unmanned surface and subsurface systems Gibbs and Cox will be combined with lie doses Maritime systems Division and operate under Dianetics within the defense solutions segment.
In addition, we're seeing early returns from our 19 O..1 group of acquisition, which we closed in January of this year.
Most directly 19, no 1 is providing significant support to the N. Gen program transition and operations day.
<unk> significantly expanded their workforce grown the current enterprise I T operations Center in Virginia, and accelerated the establishment of New engine service techs desk locations, and San Diego, Norfolk and Boise.
19 of one's platform delivered I T services made them the best choice for the program's requirements in this area.
19 of 1 was also instrumental and securing 125 million follow on contract with the Bureau of alcohol tobacco firearms and explosives for managed it services.
19, O ones and strong customer relationships with the a T F coupled with their on fishing and as a service delivery model made them key to the bid and execution strategies.
In addition to deploying to deploying capital to spur and growth.
We're also committed to returning capital to shareholders to that and our board just approved a 6% increase to the quarterly dividend.
This increase reflects the confidence of the board of directors and the management team and the quality of our earnings and our ability to generate cash.
Number 4.
And this is a people business and this quarter offered further proof that we are and employer of choice of choice that can attract the workforce needed to meet our financial commitments.
During the quarter, we hired more than 4500 people and at the end of the quarter, we were more than 42000 and strong.
Our head count grew 6% sequentially and 11% year over year.
Our ability to attract top talent in this manner is important as we staff up to successfully execute the new programs and 1 of the reasons, we're attractive to job applicants is that we invest in talent management and career development.
We regularly review talent and planned development actions, including the rotations at all levels throughout the company.
As an example, executive Vice President and Jim Cantor recently announced his intent to retire after a distinguished 31 year career at light us.
This enabled us to reconfigure our team to optimize performance given our rapid growth and the changes in market priorities I asked Vicki Shymanski, who is leading our intelligence group to assume the new role of executive Vice President corporate operations and her new role.
Vicki will drive operational performance and implementation of strategic functional initiatives.
Roy Stevens, who led business development and strategy succeeded Vicki as the president of the intelligence group.
In addition, I asked Chief Human Resources Officer, Paul Angola to lead and strategic effort to chart, our way forward and the National security space market.
These changes will help us prepare for an uncertain future.
A few weeks ago, we kicked off the million dollar move the needle sweepstakes to encourage our employees to get vaccinated against COVID-19, and hasten our coming back together.
At the time all of our facilities were open and all of vaccinated and about individuals', we're able to work with out of mask.
A lot has changed in the past weeks, the highly contagious Delta variant and the infection trends are disturbing.
As we have throughout the pandemic will comply with all CDC guidelines and most of our facilities will require masks regardless of vaccination status.
And while we do not expect that our customers will be shutting down their offices again, we cannot be certain.
And the face of that uncertainty, we have decided to keep our current forward guidance in place and Chris will walk you through that in more detail.
For me part of returning to normal is being able to get together face to face with our investors and analysts. It is our intent to host an investor day in New York on October 7th.
We have a compelling story to tell and we look forward to doing just that.
Closely watch for Covid protocols from New York City and update you if our plans change.
Finally Fran.
Frank Kendall has stepped down from our board to serve as the Secretary of the Air Force I want to thank Frank for his service to light OS and more importantly to the Air Force the department of defense and the nation.
I'll now turn the call over to Chris Cage, and I'm delighted to have Chris step up to the CFO role and join US on these calls.
Thanks, Roger and thanks to everyone for joining us today I've worked in light of those for 23 years and I'm personally benefited from the forward thinking developmental programs that Roger referenced earlier.
My predecessor, and mentor, Jim Reagan and created a very strong team instead of processes and disciplines that I've had the opportunity to help shape over the last few years going forward. My initial areas of focus will be threefold and delivering on our financial commitments integrating acquisitions and prioritizing spending on investments to execute our strategy with that.
Let's jump right into the second quarter of fiscal year, 2020.1 results and.
Beginning with the income statement on slide 5 I will first run through the financial results at the corporate level, then turn to the segment level to address the primary revenue and profitability drivers as Roger said the highlight of the quarter was our organic growth, which is truly unprecedented in our industry out of our scale revenues for the quarter were $3.4 of 5 billion.
Up 18% compared to the prior year quarter, excluding acquired revenues of 30 of $58 million revenues increased 16% organically, notably revenues grew organically across all 3 reportable segments.
The organic growth is somewhat inflated by the dropping of revenues last year as a result of the pandemic. When for example, our V. A disability exam business was almost entirely shut down even if we add back the $132 million direct pandemic effect and the prior year organic revenue growth was still 11%.
Adjusted EBITDA was 359 million for the second quarter, which was up 5% year over year adjusted EBITDA margin decreased from 11, 8% to 10, 4% over the same period.
Excluding the Virnetx gained from the prior period adjusted EBITDA margin increased by 140 basis points and the quarter. This was primarily due to strong program management higher volumes on some fixed price programs and better direct labor utilization and non.
Non-GAAP net income was $218 million for the second quarter, which was down 2% year over year and non-GAAP diluted EPS for the quarter was $1.52 also down 2 per cent compared to the second quarter of fiscal year, 2020, excluding the impact of frenetic gain from last year's results non-GAAP diluted EPS was up 37 per cent or.
<unk> tax rate on non-GAAP income in the quarter was 24 per cent compared to the 22% we anticipated for fiscal year 'twenty 'twenty..1 this negatively impacted non-GAAP diluted EPS by 4 cents. The tax rate increase was primarily across our international business. The largest single driver was that in Q2, we recognized the full.
The impact of the recently enacted increase and the U K corporate tax rate from 19 to 25 per cent.
Now for an overview of the second on segment results on slide 6 defense solutions revenues increased by 14% compared to the prior year quarter, excluding the acquisitions of <unk> 19 of 1 group and Gibson Cox organic revenue was up 12% primarily from ramping up recent contract wins, such as engine and increase weapon.
System's development within Dianetics.
The civil revenues increased 5 per cent compared to the prior year quarter with about half coming from the S D and a acquisition and half driven by increased demand on large programs such as Hanford site integration.
Health revenues increased 62 per cent compared to the prior year quarter and all of that growth was organic we had a large year over year increase on the dim sum program as well as the nice ramp on the new military and family life counseling boat program or inflict.
The largest increase though was and the VA disability examination business and our Q T. C subsidiary and remember this was the business hardest hit by the pandemic and the year ago quarter, and now volumes are higher than ever as we continue to work through the backlog of exams.
On the margin front defense solutions non-GAAP operating income margin for the quarter came in at 8.3%, which was up 20 basis points compared to the prior year quarter Civil non-GAAP operating margin declined from 12, 9% and the prior year quarter to 9.1 per cent as we had fewer deliveries of our border imports security systems and.
The airport screening systems, finally, and most significantly health non-GAAP operating income margin for the quarter was up to 17.8 per cent compared to 5.3% and the prior year quarter. This quarter's strong margin performance benefited from the significantly increased revenue volume, but the year over year improvement was enabled by the strategic.
We made a year ago to keep our workforce in place and ready to meet the coming customer demand.
Turning now to cash flow and the balance sheet on slide 7 operating cash flow for the quarter was $17 million and free cash flow, which is net of capital expenditures was the usage of $4 million. During the second quarter. We settled the accounts receivable monetization program, which negatively affected our operating and free cash flow by $94 million.
On a year to date basis, the a our monetization program is neutral to cash flow and we do not plan to sell any more of receivables.
During the quarter, we used working capital to fund the startup of new programs and the expansion of existing programs and drive strong organic growth you can see this impact most clearly and the drawdown of advanced payments compared to last year cash generation from the business segments was right on plan for the first half of the year and actually ahead of last year, but that performance is.
Over shadowed by 1 time non operational cash benefits and the first half of 2020. These include $225 million from the Ey, our monetization program $85 million from Barnett ex $48 million and cares Act tax deferrals and $103 million and lower cash taxes, which is just the timing issue.
During the second quarter, we paid down $27 million of debt and returned $48 million to shareholders and quarterly dividends and.
As laid out and Fridays 8-K, our board of directors approved of 6% increase and the dividend beginning in September. This is our first increase and 2 years and reflects our confidence and the future outlook and commitment to shareholder returns.
In addition, we paid net consideration of 376 million to acquire and Gibson, Cox, which positions us to provide a broad set of engineering solutions to the U S and the international navies Gibbs and Cox is contributing a little more than $100 million and revenues. This year at margins above the defense solutions segment average given its higher.
And of fixed price work.
The finance the transaction, we borrowed $380 million with the 1 year maturity of very attractive terms no more than LIBOR, plus 113 basis points.
As of July 2021, we had $338 million and cash and cash equivalents and $5.1 billion of debt.
Last month, we establish the commercial paper program for short term liquidity management commercial paper will give us more flexibility at a lower cost and selling of accounts receivable.
The commercial paper is only available to us because our debt is investment grade and we view our investment grade rating as a strategic asset over the remainder of the year. Our primary capital deployment priority will be debt Paydown as we returned to a normalized leverage ratio of 3 times, we remain committed to our long term balance capital deployment.
<unk>, which consists of being appropriately levered and maintaining our investment grade rating returning of quarterly dividend to our shareholders reinvesting for growth, both organically and inorganically and returning excess cash to shareholders and a tax efficient manner.
On to the forward outlook as shown on slide 8 and we're maintaining our guidance for fiscal year 2021, including revenue between $13.7 and $14.1 billion adjusted EBITDA margin between 10, 5 and 10, 7% non-GAAP diluted earnings per share between $6.35, and $6.65.
And the operating cash flow at or above $875 million as the year progresses, we normally tightened our guidance ranges, but there are a lot of forces at play including potential worsening of the COVID-19 situation with the more contagious dealt the variant and <unk>.
Stagnation and vaccination rates as well as ongoing challenges and the global supply chain, especially around computer chips on.
On revenues and Jan is ramping well, but this is still a new customer and new contract. So we don't want have and established history of order flow and don't want to get ahead of ourselves. The intelligence community award decisions have slowed noticeably and were also incrementally more cautious on the bounce back of the Air International Airport screening market. So we're not forecasting of return.
And the growth there until 2023, the Gibson Cox acquisition should keep us comfortably in our revenue range, but it likely won't put us above the range, we expect revenues to grow fairly linearly through the back half of the year from Q2 levels growth drivers and the third and fourth quarters include the full contribution of Gibbs and Cox.
The continued ramp on engine and flick and several other programs.
Towards the end of the year, we expect the VA medical exams will begin to return to their pre pandemic levels.
On EBITDA margins year to date performance. The second quarter was 11, 1% to land and the guidance range for the year adjusted EBITDA margin for the back half of the year will be around the same level as this quarter non-GAAP diluted EPS will generally follow revenue and margin. However, we're now forecasting the FY 'twenty 1 tax rate.
To be between 23, and 23.5 per cent instead of our original 22 per cent forecast, which slightly outweighs the accretion from Gibson Cox. In addition to the international tax headwinds I mentioned earlier, we're now forecasting of lower deduction for share based compensation based on stock price performance over the first half of the year finally.
We expect cash flow to follow our normal pattern and accelerate in the back half of the year to land us at the guy to the level over the past 5 years, we've generated an average of 65% annual operating cash flow and the third and fourth quarters that pattern will be slightly more pronounced this year as a result of the working capital debt, we have devoted and the first half of this year to drive.
17% year over year growth, we have of detailed execution plans to achieve our operating cash flow guidance and with that I'll turn the call over to Hector. So we can take some questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you would like to remove your question from the queue for participants using speaker equipment.
And may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Yeah.
Your first question comes from the line of of Sheila <unk> with Jefferies. Please proceed with your question Hi, Good morning Roger.
Good morning, Sheila and.
And welcome Chris and thank you.
So maybe I'm Roger if you could comment on your Intel business, how large is that and you mentioned some delays there because I think was down mid single digits and the quarters. So maybe what's going on with the Intel customers, specifically and what sort of delays or anything.
And it's a little bit larger than $2 billion and of course, it's in our defense solutions segment. So we don't really spike it out the good news for US is after the quarter, we did win the Recompete, which which as you.
Below a $1 billion, but what we've what we've seen overall is it just oh.
It has taken them longer to get through their acquisition process and.
And awards Recompete and new business that we had put in our plan and have taken literally months or quarters.
To come to fruition and what that has meant for us and for others and the industry, rather and booking the full increment of of Recompete, we're getting shorter extensions and so it's not really contributing to the increase in backlog.
But in the last quarter or 2 we really haven't lost.
And a significant amount of business. That's just been like a lot of things and Covid things have just been move into the right.
Okay, and then maybe 1 quick 1 on margins and you guys did really well with the first half margin up 11% I'm, sorry, 11% EBITDA margin and your implied guidance of 10% is this the start of Christmas conservatism or is that maybe mostly due to the civil margin impact.
And that looked like it was down and the quarter and I think you mentioned it and the security business.
Sheila This is Chris Hey, and thank you and and.
No pattern of conservatism here, but we and we laid out some reasons to be cautious right and and so there are some unknowns you know last year with Covid things whipsawed, a little bit so with Delta variant and we're being conservative there.
We laid out for civil of course, we're expecting some uplift over time from the security products business and not just the aviation side, but the ports and borders which of that business has performed very well for us on the legacy basis.
Yeah. There are some puts and takes we're still intending to increase our level of investment on research and development, we built that into our plan all year long and so some of that is is programmed and for the back half of the year, but we want to make sure that we can deliver on these commitments.
Thank you.
Thanks, Sheila thanks.
Yeah.
Your next question comes from the line of Robert Springer and with Credit Suisse. Please proceed with your question.
Hi, good morning.
Hey, good morning, Rob.
So Roger maybe Chris you talked about your attention of the topline guidance a couple of times here, so far but there are a bunch of moving pieces.
And I was wondering if we could size some of this would it be right to characterize.
And the naval architecture business is around I don't know 80 and $90 million a quarter.
No we would say maybe of 100 for the half and so and remember rats about what we get so it's about a half a year of call. It 100, maybe a little bit better than 100, and its growing but for the half that we'll book it.
On a rounded to 100.
Okay, and then is that and and that's what you're thinking in terms of maybe offsetting downside from Covid and I know COVID-19. The tough discussion to begin with but how are you thinking about that and maybe another way to ask this Roger is half of your organic growth targets changed since Q1 for the 3 segments.
Well you know we're talking on 113, 9 so and math I'm just talking about that yeah, I mean, it's not appreciably.
Hey, Rob and you and I think the other folks on the call know, where we were a year ago and.
And when we thought we made a reasonable.
The change a year ago, and we sort of walked into the second wave and I think we all learned that this COVID-19 thing is unpredictable throw onto that the shortage of computer chips, and which and we usually get a lot of material deliveries from the second half.
And although we've seen some lengthening and the supply chain, we don't see any shortages, yet, but I I wish you all have taught us a great lesson and the last 12 months and I kind of like where we are yeah gives you and Cox gives us a little bit of lift, but there's a ton of uncertainty out there and the next 6 months.
Yeah, Robyn Hey, this is Chris just to add onto that and obviously, we do a detailed forecasts and ops reviews quarterly with all of our business lines and there's always movements right across the portfolio. Roger just talked to about the Intel delays and so that might've been of business area where are some.
Some of the things that we put into the pipeline hasn't come out yet we were hopeful that some of those wood and potentially give some uplift none of those have been lost.
But there's always small movements within the portfolio within $13.9 billion midpoint that we're driving towards and so the Gibson Cox piece potentially helps offset some of that or give us some capacity for downside risk given the COVID-19 situation.
Okay, I guess, what I'm really looking for is because last year was so challenging and and this year, you're catching up a lot and you of a lot of good businesses that are growing I mean, this obviously is the high growth year that youre of the highest grower and the sectors we've discussed.
And maybe high level, Roger looking into the future once things normalize how do you see the growth patterns and the business.
Well, we still we still see the strong growth, but not at the level that we have.
We've just demonstrated.
At our Investor meeting 2 years ago, we kind of talked about 5 right and we'll talk about that again in October. So clearly we're comfortable with 5 but you know what we have been doing over the last couple of quarters is really unprecedented and.
And I don't expect a pain and another quarter like we did any of the some of that certainly year over year as COVID-19 recovery, but.
And you know we've we've enjoyed a significant number of wins and a high percentage of our competes so we're still very bullish on our long term growth prospects, but not at the double digit level.
Okay. Okay. Thanks, very much yeah. Thanks, Rob.
Yeah.
Your next question comes from the line of Cai is on rumor with Cowen. Please proceed with your question.
Yes terrific. Thank you very much and so.
So Roger.
The 1 the aegis, but it's under protest maybe update us on that and on your.
Your larger outstanding bids I believe the include and Uds.
Uds, Recompete and the $3.5 billion and FAA Award.
Okay got it thanks, and and Hey, good morning.
So we won the it's of Nash.
Of our bid about you know and the order of $2.5 billion.
It was protested by the incumbent and as it seems everything is nowadays.
NASA is taking corrective action.
And so you know it's.
It's a little hard to forecast what the outcome will be.
History has told US you know Nash it takes corrective action they make on another award decision and then of course, usually that's followed by another protests and those tend to last you know kind of a 100 days and so it may take them. Another you know 3 or 4 weeks to do there correct.
[noise] of action and then you tack on another 3 months on the back of that so.
We suspect we will be talking about NASA interest through the third and fourth quarter of unfortunately.
On that as you know, it's it's a a big contract up at dish are we're hoping it will be of fourth quarter award of it could easily slide into first quarter and I would suspect Cai that that will be protested.
And 1.1 way or the other.
The U D S bid.
Which is a N G E which is in the <unk>.
Normally 4 to 5 billion our share.
And they've got a large bid.
And we expected that to come out you know July and August there were some other things going on and N G E.
Which is in the Intel group Sheila's question, which.
And may cause that to be delayed.
You know it could happen and August could happen in September are frankly, the acquisition team and NGA has really busy and.
And when they get around to clearing the award they'll make the award we think its third quarter, but you know these things become.
Ever increasingly hard to forecast, but those those of the big ones that are out there. There's some other things that are down and the $1 billion level.
Great. Thank you and then if I could follow up on Sheila's question about margin.
It sounded like you went out of your way to to to remind people that your long term target is 10%, it's not 10.4% I guess as we just look at next year I would assume health of the margin has to be down because you don't have the V. A catch up if you get aegis that's below.
Oh average so and I assume civil also would have downward pressure year over year. So is that.
Calling out the 10% just to be conservative or is there a real concern the realistically theres no way tend on the half is kind of anything you could do on a sustainable basis right.
Go ahead, Chris Im sorry, Roger So Cai Chris here I, just was kind of jumping on that first of all we weren't trying to send the signal about 2020.2 yet right. That's what we will lay out when we get to Investor day in October, but there's more going on to you know what you pointed out and you know those are very astute observations number 1 and Roger talked about 19 O..1.
And the contribution that's making to our portfolio and that would really be and enabler across not only the the defense opportunities and enterprise I T. But also into the civil segment and others to help us deliver those capabilities more cost effectively and drive margin uplift. So we see that as something that will help us there obviously.
And the civil segment margin.
Well, we'll ride up with the recovery and our security products business and not just the aviation side, but as I mentioned ports and borders and and there are opportunities whether it's within the infrastructure bill or otherwise with our customers internationally.
For that line of business that we're very bullish on so those things would help us lift margins on area and we do have to be prepared for health margins moderating back down a bit as the exam backlog works its way down.
But again that will still be a robust part of the portfolio on margin. So more to come in October but I don't think you should read in that we're resetting to 10% of longer term.
Thank you very much thanks, Ken.
Your next question comes from the line of Gavin Parsons with Goldman Sachs. Please proceed with your question.
Hey, good morning, good morning.
Good morning.
Roger I just wanted to clarify your organic gross comment in response of Rob's question, you said and the last Investor day, and talk about 5% youre comfortable with that without getting ahead of the Investor day targets can you just clarify if you mean do you think you can continue to grow 5 on a multi year outlook.
The let's I Wanna be absolutely.
Clear the long term outlook that is out is what we gave at the Investor Conference Gosh in May 2 years ago, and we raised it from 3 to 5 okay. We have done nothing to change that okay, and that's what I was.
Just trying to articulate to Rob.
That being said our organic growth frankly of our total growth has been.
Really remarkable.
And our book to Bill.
It's just been it's just been.
It's just been great and then.
And the team has done such a great job on.
And I can update the 5% until October.
But.
I've tried to give reasons why there should be a lot of confidence at 5 or perhaps better.
So Gavin and that's about as far as I can go.
Okay now thats, great I appreciate the clarification and I just wanted to make that clear.
And then.
Chris anything you could do to help us quantify the of the health care exam contribution.
And that business is running 30% above 2019 levels, but obviously you have some some other growth drivers in there so any sense of what maybe that business has grown versus 2019, excluding the the lumpiness and exams, yeah, Gavin and I mean as you can appreciate there are some sensitivities on getting too far down into the portfolio competitively or otherwise on that.
But that's not the only thing that's going on and health. That's the point, we wanted to make and we've told you for a long time to the dim sum of program would be ramping up and has that team is performing exceptionally well and <unk> is really on a nice trajectory the ramp up and those margins will be lower than other parts of the portfolio initially, but they'll have an opportunity to <unk>.
<unk> over time, and we've got zero contribution from our HRP and these numbers right. So that will be something that we'll look forward to next year to really ramp up as that program and gets underway. So the the exam businesses above its historical levels, but quite honestly that team has delivered so well the the customer is looking to send more work our way over time.
And so we're prepared to accommodate them and their needs however, possible and so the the hope is that we can continue that at a nice clip.
Thank you.
Thanks, Kevin.
Your next question comes from the line of Matt <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, guys. Thanks for the question.
Could you kind of update what of your latest thoughts on the infrastructure, Bill and and maybe areas where you could see.
The benefit from that.
A great question and of course, we're hoping.
And then there'll be.
And our rare show of bipartisan Ism and you know that's looks like it's of $550 billion plus over what we would have seen.
And yeah, there's a lot of focus on your roads and public transit and water systems, but.
We think broadband.
The airports porch waterways security equipment.
And then we think there's going to be emphasis on.
Protecting the infrastructure and whether that be cyber security or grid hardening of that is right and our swim Lane and then we're really excited about 5 G and frankly 5 G are really to everyone and the country and we think that will spur.
Sort of of another big investment and the <unk> technology is the ability of all of us to function from and edge device.
The phones that we have today are just the beginning when we all have 5 G. The functionality that you will carry you know and.
And your pocket is going to increase by an order of magnitude and that with cloud and as a service we could see that is bringing a whole new round of investment and application migration. So we're very bullish now I will caution everyone. Its you know our typical federal.
The government you know authorize the appropriate than the you know it gets distributed to the agencies. They put plans together and then they put out rfps and they have industry days and we bid and you know I don't I went on it sound too negative here, but it takes a lot.
Long time for money and like that to flow through the system to where we win contracts. We started performing we turn it into revenue and then finally into cash and earnings. So it's it's all positive and it's positive for us not only because of our civil group, but really across the board and everything.
And that we do and technology.
It's going to be.
It's gonna be months or years away, but.
The overall positive.
Thanks, and I guess I can say.
On the Covid and at the latest wave and it sounds like that the big driver kind of conservative guidance for the rest of your are you seeing any signs.
And from particular areas that.
Maybe customers and are considering closing down locations again or contracts getting delayed or.
And anything that Youre seeing there just is that sort of just caution on the guidance.
We haven't seen customers like we did when we were talking about 36 standard of the cares Act and the Intel <unk>.
And to shift work.
Yeah, and just what we all know I'm on the President comes on National TV and talks about a mask mandate.
We all the standup and listen.
And we're essentially going back to a masked mandate. According to the CDC guidelines and we would expect all of our customers to do that.
Our bigger concern for us is really what's going on outside of the U S and as you know we have significant operations in Australia, the UK, the middle East and.
And.
They are hunkering down again and in Australia, not only as the difficult to get into the country, it's different and difficult to get a round of the country to go from Melbourne, the camera or and the Sydney and and and I think Chris addressed it well, but our S D and E business and certainly the part that we have.
Wired is heavily dependent on international business, which is dependent upon.
The tariffs on on airline tickets and when the volume is down the money is not there and.
And although we have not lost any significant competitions and the S. D and a business we have seen many many canceled and delayed so that I think the the impact for us will be and our civil segment in the business that we referred to as security detection and automation.
Got it. Thank you yeah. Thanks, Matt.
The next question comes from the line of Peter Arment with Baird. Please proceed with your question.
Hi, Good morning, you actually have Eric Ruden on the line from Peter today.
And just a quick 1 from me with a lot of the focus across many industries today of being on rising input costs and labor being the lion's share of yours are you seeing.
And any pressure there I know you mentioned the 4500, new hires so any color on how you are offsetting these headwinds and the current environment and then how much additional staffing is neither the near term.
Let's see.
Yeah, it's a it's sort of a mixed answer.
The.
And we refer to 1 of his unicorns, and so shoveling with a lifestyle polygraph of security clearance and can program and our.
Computer language called Python.
And the National capital region around D. C. Yes, we're seeing a lot of competition for that person.
And in order to get the staff that we need.
We have to compete and that is that is driving up labor in those areas.
In other areas there's.
A lot of people available we've been able to meet our hiring goals and of course as we have said on this call. We have a strategy to deconcentrate, our work and the National capital region and move to areas of the country, where the workforce is more readily available.
19 of 1 acquisition, which I know, we haven't talked a lot about has a significant presence and blacksburg and of great relationship with Virginia Tech and that was just 1 more reason why it was attractive to us and it opens up of new workforce for US you know we have the software development center and Morgantown at Westwood.
The University, who have won and <unk>.
Charlottesville at Uba and now we have 1 and.
And Blacksburg.
Overall, we're expecting to hire you know maybe a number that's in the 9 to 10000, new and we're at the well I think I said 4500 were a little bit better than that now because of the Navy nextgen staffing.
And which has gone changyou to go very very well and we have enjoyed.
Enjoyed what we call our incumbent and capture where people who are on the contract with the prior of contractor have elected to come to work in light of show were actually significantly above.
Above that that the <unk>.
Number and so where we are on track to meet our hiring goals, but there's always that.
Specific individual you know of ph D and radiology, that's difficult to find especially if you're geographically limited as you often are and the Intel business.
Okay. Thanks, that's very helpful. The other 1 from me thanks.
Yeah.
Okay.
The next question comes from the line of Joseph de Nardi with Stifel. Please proceed with your question.
Okay.
Hey, Joe the out there.
Joe where are you on mute.
You're not going to go ahead and comes from.
Your next question comes from the line of Tobey Sommer with Truest Securities. Please proceed with your question.
Thank you.
Uh huh.
Hoping you could speak to how you anticipate wage inflation should it sort of materializing and grip broadly impacting the business and when you describe your answer could you touch on the different.
Contract types to the extent that that could be informative.
Yeah, and totally all star and <unk>.
Chris can come in with some of the numbers you know we have a portfolio mix, which is a little bit of it's almost 50.50, and it's a little bit off from that which is fixed price.
And some of our fixed price work is what we call the time of materials, but think of that is fixed rate.
And so its so much per hour and the customer buys number of hours and then we have what we call our cost reimbursable or cost type contracts and.
The let me start very simple and then I'll share if I can address your question clearly on the cost Reimbursable work. If there is wage inflation that is essentially becomes a pass through to the customer and.
And that's not as.
And maybe not quite as positive as it sounds because customers live on annual budgets and if you're a NASA customer you have ex for a program of any given year, you don't have ex plus inflation and so if our wages increase inside of budget year.
The often the customer will have to decrease scope because they don't have any additional funds.
To execute the program and then of course on fixed price. We have said, we will we will do a program or complete a task for a fixed dollar amount and.
And they are therefore rely on us to balance the cost per hour with the number of hours and our challenge and I think it will be the challenge across the industry. If we see significant wage inflation above what we estimate when we bid.
And we're gonna have to find new efficiencies and service and delivery to offset that inflation and we're always trying to do that.
And why sometimes on fixed price programs, our profit margin might be a little bit better.
And.
We'll just have to do more of that part of the again going back to car 19 O..1 comment the excitement of about 19 O 1 and.
Is it.
It has and as a service platform, which is really independent on labor. So we charged so much for a service and we use of essentially a application and it platform to deliver that and there's a lot of opportunity for us to create new efficiencies through the service and delivery models.
And Tobey this is Chris just to add on to Roger's point of you get most of the the.
And the issues here.
Every year, we do a detailed pricing buildup multiyear pricing buildup for our indirect and our direct labor costs and certainly contemplate some level of inflation as we build multiyear projections around that if it turns out the wage inflation is outpacing what we've estimated and we have an opportunity to refresh that which.
We will do and we'll build those costs in and and so you really are just you know on any given time you might win some contracts, where you price them with the old rates and to Roger's point, you have to find opportunities to drive efficiencies to protect margins, but on the future bids where pricing and what we think it requires to execute the work. So we're very transparent.
And sparing of about that with our customers and you know we've got good competitive Intel on where we think we need to be on a price of the wins all of those factors play into how do we deliver how do we win work and how do we maintain the margin profile of that we're committing to you yeah. Toby 1.1 additional thought.
Just because I think it's a really thought provoking question 1 of the things that we have seen is.
More as we mix more college hires and less experienced employees into the mix. They are what we call labor categories and the wrap range. They are.
They make less of.
And we've been thrilled with the quality of our less experienced workforce and their ability to do the job.
And that's another lever for us as we <unk>.
The increase our college hiring.
And to use more of that newly graduated workforce in key positions.
Thank you very much and I wanted to get your perspective on.
[noise], continuing resolution and what what sort of the.
The the date as you might expect that to ex.
And at this juncture, yeah, I I'll be really quick we want to get 1 or 2 more questions and.
<unk>.
And I think everyone does expect to see our at the end of the fiscal year I'm not optimistic.
I don't think we'll have a government shutdown and I think we'll get through the debt ceiling and limit and like there is any appetite for that and either side of the aisle.
I love to be optimistic and say, we're gonna get of Bill before the end of the year, but I'm not I think we'll run OCR through into the first quarter I'm just be of everything it seems to be going on.
Oh that would be that would be my forecast and what that will do is we all know is the work. That's under contract will continue new starts will get delayed by way of new starts are getting delayed anyway. So.
And as we have said on again, many many times I think and.
What is it 19 of the last 20 years, we've had a CR. So I don't see it as a big impact to our business.
And I wish I would love to see of Bill, but we're we're certainly able to handle the C. R. As long as it doesn't go past first quarter.
Thanks, Tobey thank you.
The next question comes from the line of Joseph de Nardi with Stifel. Please proceed with your question.
Hi, Thanks, Good morning, sorry, you've got and got me.
And maybe Roger Chris just following up on the on a prior question and.
Enterprise that he has been a big focus for you all and obviously a lot of success, there with Amgen and now aegis.
Can't imagine it would be such a focus of that work was dilutive to margin. So is there a rule of thumb say for a 10 year contract win that work becomes accretive is it right away does it take a few years is it not until the end of the contract how does that work generally you mean and accretive to our average margin or Korea.
The EPS.
Read of to your average.
There is not a rule of and it really it's customer by customer and competition by competition.
We have some programs that start out and they are above our margin.
We have other programs.
E L.
Our HRP, which is really not on it program, but our HRP has of 6 months very low level transition and built in so we won't see the RH RFP as accretive to margins until significantly into next year, just because of the way the contract is structured so there's not a particular.
Our rule of thumb, but.
Generalized on this call and the past us and it takes us a while after we staff up and we have demonstrated performance to be confident and therefore to have to raise of our accrual rate, but I'll turn it over to Chris and Joe I'd say, usually we kind of say give us the year and a half the 2 years it depends.
And we like about those contracts in general is there often whether of fixed unit rate or fixed price and we do think as we understand the environment better.
The opportunities to introduce more efficiencies into the environment and drive savings that way through automation throughout the service et cetera, with workforce rebalancing as Roger indicated and you know what can you get for lower.
Our level of employees potentially so everyone's a little bit different and it depends on whether there's a transition phase how that was bid but they are paying you for so really contract by contract.
Got it that's helpful. And then Roger you said earlier that you.
You can't necessarily expect to grow 10% every year, which is which is understandable and I'm just curious.
If you if you see that because youre just trying to manage expectations, which is obviously fair or do you not see the opportunities in terms of taking market share.
Over the next couple of years that maybe you had a few years ago.
Yeah, Hey, Joe.
It's really more of the former.
And without putting too many numbers out there.
We intend this year.
To submit more proposals and aggregate than we did last year.
Alright, and we will look at our pipeline and you know we have a fairly well disciplined.
The business development process, where we go out or way of 5 to 10 years, we build the pipeline of potential business.
We are not.
We are not constrained by opportunity and in fact, what we are trying to do is to call out of our pipeline earlier those things that are not if you will not and our strike zone. So we spend our new business funds more efficiently, but we will submit more proposals.
And this year than we did last year and clearly last year, we did more than the year before so it's really not opportunity. It is oh gosh I'd love to think we could grow 10% forever.
And that we were.
We're sort of of Silicon Valley, you know of high Tech startup and it's just.
We've been very very fortunate and we don't want to get too far over our skis.
Thank you.
Yeah.
Our final question today comes from Mariana Perez Mora with Bank of America. Please proceed with your question.
Good morning, everyone and thank you Hey, good morning, good morning.
And Adam.
The outlook you mentioned the challenges related to the supply chain, and especially the lengthening and the supply chain and B could.
Would you mind TV ads on the gains on the color on the impact so far on how should the seat about the potential impact in the future.
I think I understood. Your question, let me take a shot at it and the X so far on yeah the chain challenges.
And we haven't seen a lot, we probably have seen and and we install a lot of end user equipment as part of several of our programs are and.
And so we buy from all of the household names that you're familiar with and what we're talking about silicon wafers that then get converted into processors, both general purpose processors and application specific integrated circuits.
And what we thought was sort of.
Covid related and what kind of and put it into a big category as we sort of started to come out of Covid, we find that parts of the supply chain shut down in the slower and computer chip market and it is not coming back as quickly as anyone thought.
And in fact in some markets like auto.
Their concerns and some of it certainly at the wafer level debt some of that capacity is not going to come back and all.
We have not seen shortages, we have just seen delays and and we're planning a couple of years out, but we have seen lengthening and especially for it equipment probably in the weeks to a month and some areas and material has a big impact.
On our revenue you know of both.
Good when it happens and bad when it gets delayed and it's a part of.
Why were not touch on guidance for the last 6 months, although we're doing fine now some of our contracts have significant material purchases planned for the last half of the year and out of an abundance of caution we wanted to give you visibility and transparency into our supply chain and I think Mary.
It's definitely something we will spend more time on as we build our 2022 planned because as Roger indicated we have the relationships key relationships with critical suppliers and and we stay abreast of what's going on there, but while the <unk> component.
Component of many contracts is and I always our highest margin contributor it does contribute to revenue and so therefore, it's fairly integral so as we get to the 2020 you planning, we'll make sure. We've got good line of sight on what the latest expectations are but this year with the guidance range. We provided we think we gave ourselves some latitude for some potential delays modest delays across the supply chain.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Stuart Davis for closing remarks.
Thank you Hector for your assistance on this morning's call and and thank you to all joining in this morning and for your interest and light OS. We look forward to updating you again soon and especially in October.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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