Q3 2021 Leidos Holdings Inc Earnings Call
Greetings and welcome to the lightest third quarter 2021 earnings call at.
At this time, all participants will be in listen only mode a brief.
Question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I would like to turn the conference over to Stuart Davis with Investor Relations Stuart you May now begin.
Thank you, Rob and good morning, everyone.
Like to welcome you to our third quarter fiscal year 2021 earnings Conference call.
Joining me today are 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 supplemental financial presentation slides that we'll use during today's call.
Turning to slide two of the presentation. Today's discussion contains forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties.
Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Finally as shown on slide three during the call, we will discuss GAAP and non-GAAP financial measures a reconciliation between the two is included in today's press release and presentation slides.
With that I'll turn the call over to Roger Krone, who will begin on slide four.
Thank you Stuart and thank you all for joining us this morning.
The third quarter marked another strong quarter for light OS with record levels of revenue adjusted EBITDA non-GAAP diluted EPS and backlog.
Our success is the direct result of building our business portfolio.
Focused on vital missions and a workforce that is motivated to enhance those missions through technology engineering and science as we described at our October Investor Day. We see continued success ahead based on our scale positioning and talented people.
To organize my remarks, I'll address four messages.
First our financial results demonstrate our ability to grow organically drive earnings and generate cash.
Second our business development engine delivered large and important awards that speak to our differentiated position in the market.
Third we are effectively deploying capital to create shareholder value.
And fourth we are investing in our people and building a company that we can all be proud of.
Number one our strong financial performance was highlighted by outstanding earnings and cash performance.
Revenue of $3 four 8 billion.
We're up organically, 6% year over year ahead of the market non-GAAP diluted EPS for the quarter was $1 80, which was up 22% year over year driven by.
Strong operating performance as reflected in our adjusted EBITDA margin of 11, 6%.
Finally, we generated $565 million of cash flow from operations and free cash flow of $541 million for our free cash flow conversion ratio of 211% of non-GAAP.
Net income.
With an asset light.
Model and ability to take EBITDA and to convert it to cash and a lean balance sheet.
Cash generation is a hallmark of lighthouse.
Number two busy.
Business development continues the momentum that is driving our industry, leading organic growth this year.
We achieved net bookings of $4 7 billion in the quarter, representing a book to Bill ratio of one point for our 15th consecutive quarter with a book to Bill ratio of one point or greater.
As a result.
Total backlog at the end of the quarter stood at a record $34 7 billion, which was up 9% on a year over year basis.
I'll now touch on four of our key wins.
We were awarded a 600 million prime contract to continue to support the Army is Geospatial Center Buckeye mission.
We're providing misha current mission critical unclassified high resolution color imagery and digital three D train overall operationally relevant areas of the world.
Our scale enabled us to invest in aircraft that we own and operate in a cadre of professionals to support the mission.
Through this program, we provide our war fighters with a decisive advantage on the battlefield.
And given the unclassified nature of the Buckeye data support partner nations as well as humanitarian humanitarian assistance and disaster relief.
The National Security agency awarded US a $300 million prime contract to develop and modernize the agency's technical signals intelligence mission.
Under the contract we provide the technical services to develop deploy and sustain a wide range of enhanced tech SIGINT collection production and analysis capabilities that provide our nation's leaders and military troops with actionable intelligence and critics.
Information to protect and defend our country.
The U S Army awarded our dynamics subsidiary of $237 million, two and a half year contract for the enduring indirect fires protection capability or if pik to produce a transportable system to engage and defeat cruise missile and unmanned air.
Kraft system threats.
Our solution uses an open system architecture that provides both flexibility and growth as well as full integration with the Army's integrated air and missile Defense Battle Command system.
Under this initial contract will deliver 16 launched prototypes and 60 interceptors.
This is the seed corn, if we do it right if <unk> can grow into a $1 billion plus program the.
The contract includes options for follow on production of 400 launchers with associated interceptors.
Finally, customs and border protection awarded US another important multi award <unk> IQ for non intrusive inspection.
So far this year, we've received two <unk> with a total of $870 million in ceiling value and $200 million in tasking on those contracts.
Safeguarding our nation's ports and borders is a critical priority and CBP has set a goal of 100% screening of cars and cargo at the border versus the single digit percentages that we achieved today.
Congress has appropriated a significant amount of money for more screening.
So we see this as a great opportunity for us.
Number three I view capital allocation is one of my key functions as CEO.
And we're deploying capital to create shareholder value.
During the quarter, we bought back $137 million of our stock through open market repurchases.
At our Investor Day in October we shared our target of three 5 billion in cash flow from operations from 2022 through 2024 <unk>.
After considering capital expenditures some debt Paydown and our dividend program will have approximately $2 2 billion to deploy across M&A and share repurchases.
We're always looking at technology add ons and so that pipeline is pretty active in Q3, we added a small strategic acquisition to our dynamics subsidiary to accelerate some of its growth opportunities.
Beyond that there is currently nothing major on the horizon.
We've built a portfolio that we're proud of and we think we're well positioned to grow.
We will pursue large M&A only if we find a property along the way that could really help accelerate our strategy.
Number four.
People are at the heart of what we do and this quarter demonstrated our ability to attract the talent that we need during.
During the quarter, we have hired more than 2900 people and at the end of the quarter, we were more than 43000 strong.
Our head count grew 2% sequentially and 12% year over year.
Still recruiting is an evergreen challenge.
We have about 1400 funded vacancies and recruiting and retention remains areas of strategic focus for the leadership team.
One of the reasons, we're attractive to job applicants is that we invest in upskilling, our people and building an innovation culture.
As an example in Q3, we held our first ever light us fear.
For our virtual technology conference that brought together employees from around the world to share technical solutions.
<unk> solutions architects and other technologists streamed presentations live from the U S, Australia, Israel and the U K I.
I personally saw the clear value for participants with real time answers to questions and lively chat discussions in a time of increasingly complex global challenges, our global network of customers and colleagues working together to address those challenges is a competitor.
A differentiator.
Another part of what makes <unk>. So attractive is that we're a valued values based company.
Leadership team is committed to <unk> being a great corporate citizen, we're mindful of our opportunities and responsibilities to our many stakeholders, especially as we grow with our mission to make the world safer healthier and more efficient we believe we can build a few.
Sure, where our people and technology make a real impact.
Having achieved our legacy greenhouse gas emissions reduction goal.
We have now set new environmental goals as well as social and governance goals for 2030.
Our new next level Idose ESG goals highlighted key efforts related to cultivating inclusion.
Advancing environmental sustainability and promoting healthier lives. We believe these efforts will not only sustain and enrich our culture at light OS but they will also have a positive impact on all of our stakeholders. We will report our progress annually in our Corp.
Responsibility report, which we've been publishing for more than a decade.
Through this effort, we're committed to continued transparency and how we're doing from a diversity, an environmental standpoint, as well as making the lives of our employees and communities better and so youll see that in our disclosures.
Before turning the call over to Chris I'd like to address the current budget environment as it gives important context for the guidance that he will be providing.
As expected Congress enacted a continuing resolution and suspended the debt ceiling to avoid a shutdown and economic turmoil.
Each is now set to expire on December 3rd.
The current thinking is that Congress will try to package the spending bills together into an omnibus spending bill for their president of signed before December 3rd.
Or if they may kick the can down the road and pass another CR that could last until next March.
In addition, the house has indicated that it plans to attempt to pass two large legislative items.
This week or maybe this month.
First the $1 two trillion bipartisan infrastructure framework to improve the country's roads bridges broadband and other critical infrastructure priorities has already passed the Senate. So it would head to the present it would had to present bidens desk for signature.
The second the one and three quarters trillion build back better proposal to overhaul the nation's health care education climate and tax laws.
Head to the Senate for debate.
The fate of both bills is still unclear as is the path forward on the spending bills and the debt ceiling.
In the face of this uncertainty some of our customers have tamped down their normal spending patterns.
Given the mission critical nature of our work, we expect only a modest impact to our results while the budget budget issues remain unresolved.
I'll now turn the call over to Chris Cage.
Thanks, Roger and thanks to everyone for joining us today.
As Roger said Q3 was an outstanding quarter for earnings and cash and I'm proud of the team for delivering such strong operating performance.
Let's jump right into the third quarter results beginning with the income statement on slide five.
Revenues for the quarter were $3, four 8 billion up 7% compared to the prior year quarter excluding.
Excluding acquired revenues of $47 million revenues increased 6% organically with organic growth across all three reportable segments.
We're pleased to continue to outpace the market, but revenues were below our expectation.
The main driver of the shortfall was in lower margin material purchases due in part to supply chain issues for computers, and technology components and due to reduced activity levels due to concerns over the predictability of funding that Roger just mentioned.
We were able to deliver strong earnings. Despite these factors adjusted EBITDA was $403 million for the third quarter, which was up 16% year over year and adjusted EBITDA margin increased from 10, 7% to 11, 6% over the same period.
This was primarily due to strong program management higher volumes on some of our fixed price programs and better direct labor utilization.
Non-GAAP net income attributable to <unk> common stockholders was $257 million for the third quarter, which was up 21% year over year and non-GAAP diluted EPS for the quarter was $1 80 up 22% compared to the third quarter of fiscal year 2020.
Now for an overview of our segment results and key drivers on slide six.
Defense solutions revenues increased by 3% compared to the prior year quarter.
Excluding the acquisitions of <unk> 19 in one group and Gibson Cox organic revenue was up 1%.
The largest growth driver was the engine ramp which more than offset the completion of the human landing system based contract within dynamics.
Civil revenues increased 3% compared to the prior year quarter and all of the growth is now organic.
The revenue increase was primarily driven by volume growth on existing programs, including the Antarctic support contract. Our managed it services support to the bureau of alcohol tobacco firearms and explosives, where we're leveraging our 19, one group acquisition and our engineering support to commercial energy providers.
Health revenues increased 31% compared to the prior year quarter and all of that growth was organic.
We continue to see a nice ramp on the military and family life counseling program and dim sum had a large year over year increase based on deployment timing.
Last quarter, the largest year over year increase was in the disability examination business in our <unk> subsidiary.
On the margin front defense solutions non-GAAP operating margin for the quarter came in at eight 8%, which was unchanged compared to the prior year quarter.
Civil non-GAAP operating margin declined from 10, 5% in the prior year quarter to nine 6% as we had fewer deliveries of airport screening systems importantly margins for both defense and civil were up sequentially consistent with our long term view for these segments.
Health non-GAAP operating margin for the quarter was at 27% compared to 16, 3% in the prior year quarter. This quarter's strong margin performance benefited from the significantly increased revenue volume on fixed unit priced programs and the higher direct labor utilization.
Turning now to cash flow and the balance sheet on slide seven.
Operating cash flow for the quarter was $565 million and free cash flow, which is net of capital expenditures was $541 million. The exceptional operating cash flow was driven by strong operational performance across the enterprise and higher customer advance payments and came despite the $62 million cash tax.
Headwind from last year's Cares Act deferral.
During the quarter, we paid down $27 million of debt and repurchased one 4 million shares in total we returned $188 million to shareholders through our quarterly dividend program and share repurchases.
As of October one 2021, we had $587 million in cash and cash equivalents and $5 1 billion of debt.
As we close out the year, we remain committed to a target leverage ratio of three times, our long term balanced capital deployment strategy remains the same and consists of being appropriately levered, maintaining our investment grade rating, returning our quarterly dividend to shareholders.
Reinvesting for growth, both organically and Inorganically and returning excess cash to shareholders in a tax efficient manner.
On now to the forward outlook.
As shown on slide eight we're updating our guidance for fiscal year 2021, let's walk through the drivers for each metric.
We now expect revenues between $13, seven and $13 9 billion, which is the bottom half of our previous range.
Supply chain delays in customers holding back spending due to concerns over the predictability of funding are the primary drivers here, but some protests have also pushed revenue out of this year and we're also mindful of the potential impact of vaccine mandates on our workforce.
At the midpoint of revenue guidance revenues in Q4 would increase about $70 million compared to Q3, driven by the continued ramp on new programs like engine offsetting moderation in the volume of our medical exam business at the revenue midpoint organic growth for the year would be 9% and total revenue growth would be 12.
<unk>.
We expect 2021 adjusted EBITDA margin between 10, nine and 11, 1%, which is above the previous range as a result of our Q3 outperformance as.
As the revenue composition shifts in the fourth quarter, we expect EBITDA margins will come back in and land in the mid 10% range.
We expect non-GAAP diluted earnings per share for the year between $6 55, and $6 75. So we've increased the midpoint of the range by <unk> 15 based on our Q3 outperformance share repurchases in the third quarter will also add about <unk> <unk> to Q4 non-GAAP diluted EPS.
Finally, our expectation for cash from operations is unchanged at $875 million or greater our strong Q3 performance increases our confidence in meeting or exceeding $875 million for the year, but the advanced payments in Q3 will be a headwind to Q forecast generation.
Before I close I want to highlight the three year targets, we laid out at Investor Day last month.
2022 through 2024, we're targeting an organic revenue CAGR of 5% to 6% adjusted EBITDA margins of 10, 5% or greater by 2020 for free cash flow conversion of approximately 100% and cumulative cash flow from operations generation of approximately $3.
$5 billion, our market positioning industry, leading scale and technology differentiation support our position and ability to deliver on these targets.
With that I'll turn the call over to Rob. So we can take some questions.
Thank you.
At this time, we'll now be conducting a question and answer session.
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One moment, please pull for questions.
Thank you and our first question comes from the line of Peter Arment with Baird. Please proceed with your questions.
Hi, Yes, good morning, Roger Chris Hey, Good morning, Peter.
Nice results, Hey, Roger you mentioned some customers.
Customers tampering down kind of in their spending plans just given the uncertainty maybe you could just give us a little more color on what specifically you've seen thanks, Yes, you know what.
<unk> happens so we ended up with.
Contractors IQ and we work on task orders and then we always anticipate especially in the next fiscal year that those customers will come forward with projects, which will expand our revenue base and it's discretionary money on their part, but its below the IQ ceiling.
And I'm.
I am thinking in my mind, primarily about three or four agencies.
And those projects just haven't materialized.
And the base program is running fine and but we always anticipate maybe 10% on some of these.
<unk> IQ kind of task order contracts it will come in.
And couple agencies, specifically just haven't been spending their project money and so it's.
Yes.
It's something we sort of plan on.
It's not unusual we've seen it before when the budget uncertainty.
Gets as bad as it is today.
And pretty much eventually they will spend that money being late next year or the year. After so the work still needs to get done.
Not getting done in third and fourth quarter and Peter the only thing I'd add is.
We're not really seeing that in our civil and health customers is pretty much in our defense solutions segment between the Intel and some defense customers, where we're seeing that activity.
Sure.
Okay I appreciate that I'll leave it there thanks alright.
Great. Thanks, Steve.
Your next question comes from the line of Seth <unk> with Jpmorgan. Please proceed with your questions.
Okay. Thanks, very much and good morning, everyone and good morning.
So.
Chris I Wonder if you could help level set us with.
<unk> business I guess from from.
From 2017 to 2019, we had adjusted bringing.
Pretty regularly in like the $275 million range in that business.
2020 included the Covid impact obviously, it would have been much higher this year, we're looking at something considerably higher than that.
Yes, maybe.
Maybe that's something approaching 500.
And so when we think about the headwind that's obviously going to be there next year.
<unk>.
Outside of the Gam revenue comes off.
Yes.
Can you help us to size.
The margin impact of that.
Well I mean first of all I want to congratulate our team I think our team has done an exceptional job running that business and continuing to optimize performance along the way.
Clearly this was a banner quarter with the growth and the margins above 20% I would tell you and we have told you that is not where we see this being sustained.
And we have worked down the backlog that came about through the pandemic and we're seeing a level of referral volume continuing to stay fairly high. So there are some reasons to be a bit optimistic there, but it will come back down and what we said before is when the business was running at a normal level. It was in the mid teen margin.
And while we don't guide by segment I would tell you somewhere at that level is certainly on the bottom end of what we feel comfortable with but with the improvements in the business operations and the growth I think there is opportunity to do better than that over time. So we're preparing for a scenario where health is not performing at these levels that we've communicated that at Investor day, and we are.
Driving the rest of the business to make sure we're driving margins up over time.
But again couldn't be more happy with the performance of the health team and we're going to sustain that performance as long as we can.
And Seth as you know we've got a couple of fairly large program starting up.
The military family life counseling program and their reserve health readiness program and they will be fully ramp next year.
And those are more towards our normative levels that you might see in our defense group and so.
It's a great business, we're really proud of the team, but next year should look more normal. There was this COVID-19 has created swings in our business that we saw last year and now as we had predicted it swinging back this year.
Okay, Great. That's very helpful. On the on the margin and then maybe just a follow up on the sales.
I assume that the exam business will be down on the top line next year, but yes to your point there there's been some nice wins and some programs ramping.
Can help grow next year.
<unk> line.
So we will obviously get into those details in our fourth quarter call with you in fact, we're going to be with our team here in a couple weeks ago into the the bottoms up annual plan, but I would say, yes. Our expectation is the health business can grow next year and Thats certainly the way we're approaching it so so more to come on the details around that but we're actively working that.
There is a healthy pipeline that we're pursuing at all times.
Great. Thank you very much thanks.
Our next question comes from the line of Kevin Parsons with Goldman Sachs. Please proceed with your questions.
Good morning, Hey, Kevin again.
Because I was hoping you could help to quantify some of the impacts of the.
Delays or impacts you sited.
And then.
Some of the other businesses that may not be kind of running at normal level health might be a little high but I think SG&A is a little low.
So if you could help to quantify the impacts of chip shortages until delays things like that that would be really helpful.
Yes.
I'll take a stab Gavin so where we took down the midpoint of our guidance of $100 million. So thats kind of the size of the pie. If you will is how we think about potential headwinds that we're facing.
On the material side, which is kind of tied up in some of the chip shortage. We've seen lack of material availability. Most are on the computing side, but some technology components impacting like our dynamics or our <unk>.
ISR airborne ISR business think of that is.
Roughly a third of the impact right.
And then we've got the budgetary headwinds, where we expected certain projects to come through we're not seeing that activity from customers. That's another.
Third of the impact and then there as this protest bucket. So we had a couple of programs that we won and in fact, we had another program that we won last quarter on the TSA side that Ted's Nsaids, which are an OEM underneath that protest and so we're not able to do some of the work. So theres. This bucket of protest activity that cost us.
Some of the revenue Miss as well so there's a few of those things going on we didn't talk about.
Afghanistan drawdown, but I would just add that and that's certainly probably at the higher end of our previous estimates on what that impact would be so there's a little bit of we expected or hoped that we would have some over the horizon support that's not really materializing. So all those things added together kind of the $100 million ish guide down on the midpoint of our revenue.
Yes.
Got it and then maybe on civil margins I appreciate that can be pretty lumpy with timing of hardware deliveries, but.
Below average quarters in a row here.
Anything that's changed structurally there or is there just a lot of timing going on there as well.
Would you expect that to normalize itself so.
So I would tell you again I was pleased to see the sequential improvement from Q2.
That's our expectation going into next year, we'll continue to see that tick up the team has done an excellent job.
Getting the <unk> business ready for growth in the future when that market rebounds, a lot of new talent has been added to the team we're happy about that but there's a lot of other things going on civil and I highlighted the growth in our commercial energy customer business, which is above the segment average on margins that will continue to see expansion, we believe going into next year, which will help us.
So again, the civil business should be above the corporate average margins at slightly below right now, but that's a quarter to quarter thing that we see trending up.
Thank you.
Our next question is from the line of Sheila <unk>.
With Jefferies. Please proceed with your questions.
Hey, Thank you good morning, everyone. Thank you Marcia.
Can we think about profitability adjusted EBITDA margins are in that 10, 3% range in Q4.
11, <unk> year to date, what are the sort of the drivers of the contraction as we head into Q4 and I think.
This looks at 10, 5% margins for next year or so.
Maybe can you talk about the puts and takes in for the last quarter of the year.
What we should be considering.
Margins are mid teens next year.
That's one of the.
First of all as Sheila I'll start and Roger can add in health as we've been signaling there was the expectation that Q4 will start to see a bit of a ramp down on the medical exam business that might not be the case, but we're preparing for that to be the case and that clearly will put some dampening on margins overall I would also point to the execution in Q3 was quite strong.
<unk> in the program performance side Youll see when you get into the queue that we had an excellent quarter on net write ups.
And that helped us in the third quarter pick our margins up to 11, 6%, but we are absolutely targeting kind of that mid 10 right.
And as we paid it in Investor day, that's kind of our longer term view on where the business should be so all things considered in Q4 with the holiday season, and an uncertainty in health, we feel pretty good about landing in that area.
Okay.
And then maybe one more question Roger in the release, you said youre gaining share.
What areas do you find that youre, gaining the most traction.
Well, we have always been strongest in this this area. If you look at our our technical core competencies called digital transformation.
And this has moved to the cloud as a service.
Helping our customers operate more efficiently and what has been exciting for US is that line of business crosses really all five five business units and we've got some major wins that we've talked about we've got some things in the pipeline we have.
Actually move forward, even in the health group.
With some commercial health care providers.
And so overall.
A real strong business for us and then the other another area that's really been.
<unk> been nice and again, we've talked to we talked about this already is the the new wins in the health group, which has allowed us to grow our health group.
Faster than the rest of the business and in order to do that things like that.
Military family life counseling.
Wasn't takeaway the reserve health readiness program.
Does a takeaway from other people and we have.
As we said at our Investor day, and Sheila we've been talking about for years, we wanted to have that balanced portfolio and so we're investing in health and civil to grow.
And to grow it.
Great to go after new business, but sometimes we have to go after re competes as well and to take business away from others in our industry.
Thank you.
Yes.
Our next question is from the line of Cai von <unk> with Cowen. Please proceed with your question.
Yes. Thanks, so much for taking the question so kind of when we look at the full year and actually third quarter also while you say the guides come down $100 million. It's basically very mixed clearly health looks like it's 200 million or so better for the year and the big Miss.
<unk> is really in defense, so could you basically drill down a little bit more on the programs for example, it looks like dianetics.
Might've been short.
So we can understand which programs are contributing to the shortfall.
Sure Cai.
Obviously health being up $200 million against your estimates, we don't give the guidance by segment, but we're pleased with the health growth and in defense clearly is where we're seeing the preponderance of some of the impacts that we've talked about the Afghan drawdown that was a headwind for the team. This year and has hurt what would ordinarily be a growing airborne.
Business the material shortages, a lot of that and our Intel customers space that have been an impact we'd previously talked earlier this year on the intelligence customer award delays, having some impacts.
On the business as well so.
Those things are all factors that are driving that and then of course, the human landing system program. While we had never put that follow on in our plan clearly the $240 million that we executed on that 10 month program.
That's gone and that becomes a growth headwind now dynamics Roger featured the <unk> program in the quarter and we're very bullish on.
The growth from that over time into the future. So we're excited about some of the programs that they are winning and executing on but it is a different business model, where youre not going to see some of those large franchise program wins in each and every quarter. So there is some variability on how the growth plays out, but if you pull human landing system out of dynamics performance. They are still on a very nice.
Growth trajectory rather than the unit yes.
I would also add.
Third and fourth quarter, we tend to buy a lot of material.
In our contracts and then we kind of spend this spring installing it.
And the chip shortage has affected the type of and when you say materially and we buy raw material, but we buy a lot of computer equipment PC laptops servers routers.
Which gear and what have you and we really have seen those supply chains lengthen.
Our PC, we could use to get maybe in four months or in four weeks now probably takes 20 weeks.
Our server.
Probably the same maybe if not longer some of the networking equipment.
About the same and so normally we would place the orders.
We get through the fiscal year, we get into the next year funding. We placed these orders we get the equipment delivered before the end of the year and we book revenue against it now we're placing those orders were on backlog like everyone else in the industry and it will arrive in the first quarter and those programs.
Our primarily in our defense segment.
Okay. Thank you very much.
Next question is coming from the line of Matt Akers with Wells Fargo. Please proceed with your questions.
Hi, Thanks, Good morning can you comment on Capex.
Running a little bit lower.
Year to date is that something we should expect to pick up next year and I think you've talked about kind of one 5% of sales that kind of the right way to think about it in the future.
Hey, Matt. Thanks for the question so you're right. It has been running a little bit lower than our expectations. We do expect a modest ramp up in Q4 from what we've been running at and one 5% I would say that's kind of what we see is the upper bound right and our job is to make sure that each and every capital expenditure request passes muster.
As it relates to the returns that we expect to generate from that and we will go through the detailed scrub of that in <unk>.
As you can imagine there are some things from a supply chain issue also impacting us on the capital expenditure side, where we have Roger mentioned airborne assets in some of the planes that we're outfitting, we're not able to get some of the technology components.
To get those.
In operation, So that's taking longer than expected and some of the facilities, especially on the dynamic side for fabrication and some of our new wins.
Getting contractors getting materials to get those things outfit is taking a little bit longer but.
So a little bit of uptick is what I would expect for the fourth quarter and then as we head into next year, one 5% I would say is the upper bounds and we'll kind of see how things play out as far as what the opportunity space looks like when we go through our planning process and Matt. We just completed a big hypersonic facility in Huntsville, So thats, mostly.
In our history and then when we moved into the new headquarters here in Reston, and we had a new building in Gaithersburg.
<unk> facilitated campus point, we went through although we lease our our facilities generally we have to buy the capital equipment and do capital improvements.
So thats.
We're going to be down next year, and Chris said, Yeah, I am not sure we ever been at one 5%, but somewhere between one and one three is probably a working number and just to reiterate what Chris mentioned I can think of a couple of projects in the building that we're in which we have put on hold because we can't get the material to finish it.
There is something on a floor above us that we just had to wrap up.
And.
And Lee follow him probably get it finished probably next year. So it's just it's amazing how far reaching the supply chain is and if you look at the pictures of long Beach Harbor.
There is a lot of.
Material out there and connections.
Great. Thank you that's really helpful and I guess, just one more on Amgen is that I think last quarter. You had mentioned that was sort of one of the kind of reasons to be cautious on the guidance that it was a new program and you sort of weren't sure of.
The order pattern does that sort of fully ramped up now and is that kind of flowing through kind of at the run rate that you had expected.
Well I'll give you some details.
Cover it sufficiently.
Sufficiently crystal jumping we're fully staffed on the program.
So nominally 4000 people give or take a little bit.
<unk>.
From a revenue standpoint, though we won't hit full revenue until next quarter first quarter. So it's still got some room to go from a revenue standpoint. If you are looking for a full year then it's probably next year or maybe even 23 until we're at the absolute run rate.
But the great news is we've taken over the network.
We own it now we have.
Starting the transformation part of the program, which is to move the Navy into if you will the next generation of assure network.
<unk>.
The program is actually running really really well and we are literally.
Amazingly went from award to fully staffed and literally just a quarter or two and thats almost unprecedented so really great stuff on the program.
We're not at the Max revenue this quarter, but we've got a good shot to be close next quarter.
Team I think it's a highlight across the company of how quickly they staff that thing up and the executive management attention to get there.
Roger mentioned earlier some of our customers have special projects and engine will be a program that would have budget for special projects. So again, we're learning this customer we are ready to execute on those as those orders come through but thats a variable demand signal that we have to be prepared to respond to so.
But we're pleased with where that sits right now with room to grow.
Yes.
Great. Thank you very much.
Our next question comes from the line of David Strauss with Barclays. Please proceed with your question.
Thanks, Good morning, good morning, good morning, Dave.
I wanted to ask you.
How are.
Year recent acquisitions 19, one Gibson Cox doing the the acquired revenue in the quarter was a little lighter than what I was expecting based on kind of when you had indicated Gibson Cox would would contribute this year.
Well, it's still early.
On both of those.
Let me talk more strategically.
101 has been just a real energizer for our digital transformation work we have used.
And in 1900, one really to de risk our engine ramping and staffing.
Hey.
They have an as a service platform and have a culture that just attracts people and so we were able to set up a call center literally in a month using the people at 19 O. One and that has really allowed us to get ahead and provide that level of customer service that we wanted to get on.
On engine.
And it's.
The topline growth there's a lot of work on 19 O. One that happens through the other units and so the way we account for it if they facilitate a sale in our civil group, you'll see that revenue in our civil group and the way we account for acquisition revenue is the Standalone 19 O one on Gibbs and Cox.
On a standalone basis, which is probably not.
All that relevant even today, because we've combined our heritage.
Link lighter innovation center in Maritime group with Gibson Cox, but you don't see that in the way we account for the revenue and the cross linkages the synergies between the heritage Maritime business, where we would have <unk> in our <unk> program and some other classified program and what goes on at Gibson <unk> Youre not going.
Get that visibility in our our GAAP reported financials, but the.
Naval architecture work on the relationships at NAV Sea and in the Navy that now complement our autonomy business and the work that we do under the water has been terrific and then Gibbs and Cox on a standalone basis continue to have strong support from the Navy on the new <unk>.
<unk> contract and the new destroyer contract and.
They continue to grow and to staff.
It's really been exciting they bring.
Our level of systems engineering and platforms.
We have wanted to have for a long time and that knowledge and that culture really we're using across the whole organization.
I would add on what we love about the Gibson Cox team is there so.
Close to the customer so important to the customer's mission and Theyre going to support that mission even in advance of a contract award. So for example, just as they become part of a bigger corporation, making sure that we're getting out with the great contractual arrangements that we can recognize revenue on some of the work they're doing but they are in a good position to continue to grow and deliver.
As Roger mentioned the $19. One group is contributing a lot internally on other programs, which are adding value and will ultimately be accretive to our performance and that doesn't show up in the external report that you see.
Got it okay that helps.
And then.
Chris I wanted to ask.
On working capital so it looks like to get down closer to the $8 75, or a little above that.
You are baking in I would guess something like a couple of hundred million dollars working capital headwind in the fourth quarter. So can you talk about that and then in terms of your long range forecasts I know, we have the three and a half.
Billion in operating cash flow that you forecast, but what specifically do you have baked in there in terms of working capital do you expect working capital to kind of be a net net drag over that period. Thank you sure. David So let me first address the fourth quarter and we signaled.
The main things that are going to go on in the fourth quarter, when we talked about advance payments and so one of our large programs.
Customer funds us in advance at the end of their fiscal year, we get that money in our third quarter. There are some material.
Subcontractors and other payments that will go out in the fourth quarter right. So we get paid we pay some of them. So that will be an outflow that's already planned and programmed and then we talked we've talked a lot about engine and that's again, a new customer with new buying behavior for us and one of the things that we'll be in a position to do in the fourth quarter's procure a number of software licenses that they use and execute on.
As you can imagine some of those arrangements are paying in advance to the software license providers. The way the Navy funds those as kind of an overtime model. So theres some of that that's built in in our expectations of working capital usage.
Big picture overtime I would tell you. This I mean I like the way the team is managing working capital today I think we're having an excellent year, we're programming in improvements where we can make them.
We're thoughtful about certain particular business areas that might need a little bit of investment, but thats modest and so generally speaking our DSO. This quarter at 60 days is something that I see us being able to be sustained perhaps improved in certain spots and right now the way, we're going to manage inventory I think there is ability to continue.
<unk> tightened that down and drive improvements into that so I don't see a big change in our working capital usage to execute our growth plan over the next three years.
Alright, great. Thanks, very much thank you.
Next question is coming from the line of Mariana Perez Mora with Bank of America. Please proceed with your question.
Thank you good morning, everyone. Good morning Marianne.
So supply chain, you gave us clear on what's going on but could you. Please discuss the actions you're taking to mitigate headwinds and how much of these headwinds could actually slip into next year.
Well, we're doing what everybody else is doing.
Sure.
Purchasing organization is out.
Having discussions with all of our supplier partners.
We're trying to place orders ahead of need.
We would be willing to own and hold stock if we can get it.
We are trying to substitute what's in inventory for what's not in inventory.
We are having discussions frankly with our customers about would they rather wait.
Rather have the X laptop now or the Y laptop tomorrow by the way most of our customers are saying now, we'll wait and other months to get the Y laptop, we've got really good visibility into our supply chain, we tend to have.
From a system standpoint material resource planning.
Our our major suppliers connect into our system, So we sort of know where.
The supply as we know when it's going to arrive and as such we no we don't want to.
Get ahead of the arrival of the equipment, but like everybody in the industry.
We see this as a delay not a.
Our long term problems something that will for most of US will correct. Early next year I don't think we have the same issues that you might see in the auto industry or.
And others.
And these are.
Some supplier partners that we've got 10 year 20 year relationships with and we buy a lot of volume.
And so we have a preferred position when they get into the.
The server the router, we are near the top of the list and getting and getting our fair share, but theres only so much you can do.
Which is why we talked about it this morning is that.
Chips aren't there theyre not being put on the boards youre not being put into the equipment and we can put the equipment in the customer and take revenue credit.
Okay makes sense and then if I may switching gears to vaccine Monday.
I know the Whitehouse is already changing some flexibility on dementia and no significant impact, but it would be really helpful. If you can give us some color on the workforce vaccination rate what are the most exposed businesses and what are your actions to prepare for early December.
Well, we almost got through the call.
So I could spend an hour on this.
I'll try to give you a summary, so that you have a good sense of where we are and what we're doing.
First of all we had a sweepstakes what we call the current where we encouraged our employees to get vaccinated, we gave 10 employees.
A year salary that was very very very successful.
A lot of people link got vaccinated kind of came off the fence.
Of the we call it the move the needle sweepstakes, Okay. We are now.
Look by the way our current status is to enter our facility you have to be vaccinated today or you have to have a recent 72 hour.
Covid test and Thats all of our facilities and then customer facilities, we have to follow whatever rule the customers put in place and it varies by it varies by customer and it varies by state and it varies by County, we all know there is an executive order or $14 42 that says everyone needs to be vaccinated by.
The <unk> of December.
We're working with the customers really down to every contract officer and every contract on what that looks like I'm sure you know that it will.
Allows for exceptions because of the Ada and the Civil Rights Act, which means there is a health exception in our religious exception. We are processing exceptions through a relatively rigorous process. We have if you will forums you have to fill out and then we have a group of people who adjudicate that.
You asked me what is our current vaccination status.
I can give you a range. We think we are in the mid ninety's today.
And because <unk> data and the requirement to verify your vaccination is not in place here until the <unk> of December.
We don't know for sure but based upon all the data we've got the number of people who have already updated up loaded their vaccination card. We think we are in those mid nineties, we worry about a small percentage number of people who want to apply for an exemption won't get.
Vaccinated and simply say Hey, I.
I just don't believe it on the non Vaccinator, we think that number is in the single digit percentages were concerned.
Which is why we talked about it on the call. It could have an impact to revenue if an employee if the mandate stays in place as it's written and there's a lot of discussion even yesterday.
The firm requirement of December 8th May be relaxed, but it has not yet been although there is a lot of rhetoric from the white house, but if an employee were not to be vaccinated and we would treat that.
Mike.
Any.
Disciplinary action, where we go through an oral and then a written and then they have to go through our.
Yes.
POI disciplinary board and that will take literally months as it would if you.
<unk> parts and somebody else's parking.