Q4 2021 Leidos Holdings Inc Earnings Call
Greetings and welcome to <unk> fourth quarter 2021 earnings call at this time.
All participants are in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded at.
At this time I'll turn the conference over to Stuart Davis from Investor Relations store you may now begin.
Thank you, Rob and good morning, everyone.
I'd like to welcome you to our fourth quarter and full fiscal year, 2020 One 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'll begin on slide four.
Thank you Stuart and thank you all for joining us this morning.
2021 was a banner year for <unk> with industry, leading organic revenue growth and expanded profitability. In addition, we enhanced our market presence during the year with strategic acquisitions and investments that added important technical capabilities.
Despite the ongoing impact of COVID-19, and an extended continuing resolution we are positioned to grow in 2020 to.
Bolstered by our scale differentiated technical offerings and dedicated workforce.
In my remarks, I'll address four topics, our financial results and outlook.
Allocation business development and people.
Number one our financial performance in the quarter was strong despite a challenging market.
Revenues for the quarter were $3 49 billion up 7% year over year.
For the year revenues grew organically across all reportable segments and were up 12% in total compared to 2020.
In 2021, our adjusted EBITDA margin of 11% represented the sixth consecutive year of margin expansion.
non-GAAP diluted EPS was up 14% to $6 62.
We generated $210 million of cash flow from operations in the quarter and free cash flow of $177 million.
For the year that translates to a billion 30 of cash flow from operations of 927 million in free cash flow.
These results came despite well documented headwinds most notably a protracted continuing resolution, which slowed boats tasking on existing contracts and the award of new opportunities a resurgence of the pandemic, which lowered workforce productivity and limited our interactions.
With customers.
In our national security community transitioning to new threats.
I am proud of how well the team whether these headwinds.
In 2021, we achieved our guidance for all of our metrics, but the standout metric was cash.
Which came in well ahead of our expert expectations through close coordination with our customers and strong operational focus our asset light model lean cost structure and efficient collections process enabled us to generate strong cash flow that we can deploy.
To grow our business and drive value for our shareholders.
Which brings me to a number two capital allocation.
Over the fiscal year capital deployment was balanced with a mix of strategic acquisitions.
Pay down towards our target leverage ratio.
Enhanced dividend and share repurchases.
In the fourth quarter, we made a strategic investment in Hawkeye $3 60 to build on our multi decade heritage of serving national security space customers Hawkeye.
Hawkeye 360 is driving innovative solutions around space based radio frequency data and analytics and we're confident this investment will enable us to better serve key customers, whose safeguard the United States and allied interests.
On the opposite side of the Ledger, we agreed to divest aviation and missile solutions L. L C.
Small sheet of business within dynamics.
This divestiture allows us to focus on leading edge and technologically advanced services solutions and products that are more in our sweet spot.
In 2021, we put $270 million towards repurchasing our shares.
Looking ahead, our board of directors authorized a new share repurchase program of up to 20 million shares.
Replacing the prior authorization, we only had four 5 million shares remaining under our 20 million share authorization from 2018, and we thought it prudent to increase our buyback capability.
Under the authorization, we can repurchase shares in the open market or through privately negotiated transactions, including accelerated share repurchase transactions.
Based on the current valuation of our stock our financial outlook, our liquidity, our view of the M&A market and a consistent operating environment, we expect to be more aggressive on buybacks in 2022 and.
And Chris will provide more color on that shortly.
Number three in business development. The December quarter is seasonally is the seasonally weakest for our industry still we achieved net bookings of $3 2 billion in the quarter, representing a book to bill ratio of <unk> nine <unk>.
Importantly, about half of the awards were for new work.
For the year, we booked $15 5 billion of awards for a book to Bill ratio of one one.
Our bookings don't include anything for the roughly 4 billion of protested awards, we've been tracking although earlier. This month, we received positive developments on two of them.
The FAA re awarded US our incumbent work modernizing the national Aerospace system.
<unk> denied the protest of our takeaway of the NASA networking communications program known as agents.
We're still awaiting word on whether either firm continues to object.
Total backlog at the end of the quarter stood at 34, and a half billion, which doesn't include any future task orders for many of our large single award IDI cues like engine.
With total backlog almost two five times, our 2022 revenue we have a strong foundation for growth.
In the fourth quarter, we had large awards in each sector, including ISR support for the Air Combat command in defense operational support to a publicly traded utility and R&D support to the National Energy Technology Laboratory in civil and it.
Support to the federal parent Locators service and health.
I wanted to focus on another award that speaks to what makes dynamics so attractive to us.
Our dynamics subsidiary was awarded a six year 470, 579 million cost plus fixed fee contract to develop hypersonic hypersonic thermal protection system prototypes for the U S Army's rapid capabilities and critical.
<unk> office.
Under the contract dynamics will also support materials research novel inspection and acceptance efforts.
The thermal protection system shields elements of the long range hypersonic weapon system and the Navy conventional prompt strike system from extreme environments.
<unk> during flight.
The Army and Navy working jointly have made hypersonic weapons their top priority and this program is just one of the ways that we're supporting the broader hypersonic program.
We're also the prime contractor for the common hypersonic glide body weapon and a key subcontractor for the long range hypersonic weapon system.
These programs are well funded and dynamic dynamics is right at the center of them.
Number four our ability to recruit retain and motivate and grow our people is critical to our success.
We were relatively flat from a head count standpoint in the quarter, but were up 11% for the year.
As tough as this year has been for our customers and the market. It's been just as tough for our people.
I would like to take a moment to thank the 43000 light us employees for their unwavering commitment and collaboration in light of Covid challenges, we asked a lot of them and they truly delivered whether executing a complex engine transition three months ahead of.
Plan or successfully delivering the MHS Genesis electronic health record system to an additional 10000 clinicians and providers as part of its largest wave deployments to date our teams have put mission first.
And delivery for our customers.
One of the ways that we support our people is through a company culture that fosters a sense of belonging welcomes all perspectives and contributions and provides equitable access to opportunities and resources for everyone.
Inclusion and integrity are intrinsically linked by the responsibility to respect yourself and others are employees are empowered to uphold our values, creating a culture that we are incredibly proud of and that makes <unk> unique.
We're committed to continued transparency and how we're doing from a diversity standpoint, as well as making the lives of our employees and their communities better for the first time, we will publish our consolidated EEO one report on our website.
Which includes detailed information regarding workforce diversity. So we can chart our progress on the journey.
Before turning it over to Chris I'd like to address the current budget environment.
Since the Q3 call Congress passed the fiscal year 2022 National Defense Authorization Act and President Biden signed the bill into law.
The NDA legislation authorizes approximately 740 billion for defense programs of 25 billion increase to last year and well above the original presidential request.
Bipartisan leadership of the house and Senate Appropriations panels reached an agreement on February 9th on the physically physical year 2022, topline spending numbers for defense and nondefense programs spending levels won't be publically announced until after the Senate.
<unk> another CR.
Ever it appears they will be an increase for defense accounts and a slightly larger increase for nondefense accounts.
Ultimately 12 appropriation bills will be packaged into a single omnibus bill for floor consideration. We are hopeful that the omnibus will be brought to the floor by March eight so the president.
Can approve it so it can be approved by the Senate and then signed by the President before the March.
11th CR deadline.
With that I'll.
I'll now turn the call over to Chris Cage for more details on our results and our 2022 outlook.
Thanks, Roger and thanks to everyone for joining us today with lots to cover let's jump right into the results beginning with the income statement on slide five.
Revenues for the quarter were $3 49 billion up 7% compared to the prior year quarter.
Excluding acquired revenues of 52 million revenues increased 6% organically for.
For the year revenues were $13 74 billion, which was up 12% in total and 9% organically compared to 2020.
In the quarter, we saw a continuation of the behavior that we cited on our Q3 call, where some customers, especially in the defense and intelligence sectors worried about the extended CR and held back on funding. This was exacerbated by the limited ability to meet with customers with the onset of the omicron variant and lower than anticipated.
Direct labor given higher than normal paid time off usage by employees on cost Reimbursable contracts.
These factors led to revenues in the lower half of the guidance range that we gave on the last call.
Turning to earnings adjusted EBITDA was $359 million for the fourth quarter for an adjusted EBITDA margin of 10, 3%.
Margins were down sequentially and year over year, consistent with our prior messaging, although higher than normal leave taking and lower than normal net favorable impacts from eac's lower margins 20 to 30 basis points below our expectations.
For the year adjusted EBITDA was 151 billion, which was up 14% over fiscal year 2020.
Adjusted EBITDA margin of 11% was an improvement of 20 basis points over 2020.
In 2021, we benefited from a $26 million gain related to the mission support Alliance joint venture recorded in the first quarter and the backlog of disability exam cases that were pushed from 2020 to 2021 because of Covid.
These two items added 60 basis points to the 2021 adjusted EBITDA margin.
non-GAAP net income was $224 million for the quarter and $952 million for the year, which generated non-GAAP diluted EPS of $1 56 for the quarter and $6 62 for the year for.
For the year non-GAAP net income and non-GAAP diluted EPS were up 13% and 14% respectively compared to fiscal year 2020.
<unk> growth benefited from a reduction of about 2 million shares from repurchases during the year the.
The non-GAAP effective tax rate came in at 22, 4% for the year, which was in line with expectations.
Now for an overview of our segment results and key drivers on slide six.
Q4 defense solutions revenues of $2 6 billion increased by 7% compared to the prior year quarter.
Excluding the acquisitions of <unk> 19 in one group Gibbs and Cox and a small strategic acquisition defense solutions revenue were up 4% organically.
The largest growth driver was the engine smit ramp, which more than offset the completion of the human landing system based contract within Dianetics and the program supporting operations in Afghanistan for the full year Defense solutions revenues were $8 3 billion, an increase of 9% in total and 6% organically.
Civil revenues were $800 million in the quarter compared to $811 million the prior year quarter down 1% in total and organically in.
In the quarter lower deliveries of security products outweighed increased demand on existing programs with commercial energy providers, the FAA and the National Science Foundation and the transfer of a small number of programs from the defense solutions segment.
For the year Civil revenues increased from $2 99 billion in 2020 to three $1 6 billion driven by on contract growth across many programs and a full year of contribution from the <unk> Technologies' security detection and automation business acquisition.
Health revenues were $630 million for the quarter, an increase of 23% compared to the prior year quarter and all of that growth was organic.
The largest year over year increase was in the disability examination business.
With the military and family life counseling program, and dim sum up nicely as well.
As we previewed on the last call fourth quarter revenues for the health segment were down from the third quarter as we completed the backlog of cases from 2020 health revenues were $2 55 billion for the year up 30% over 2020 with the same drivers that I cited for the quarter.
On the margin front on slide seven defense solutions margins were relatively stable non-GAAP operating margin came in at eight 2% for the quarter compared to eight 9% in the prior year quarter and eight 6% for the year compared to eight 2% in 2020.
Civil non-GAAP operating margin for the quarter was 10%, which was up sequentially, but down from 12, 3% in the prior year quarter civil.
Civil non-GAAP operating margin for the year was 10, 2% compared to 11, 7% in the prior year.
Declines in segment profitability for the quarter and year were primarily attributable to lower volumes of security product deliveries.
Health non-GAAP operating margin for the quarter decreased from 18, 5% in the prior year quarter to 17, 8% primarily from investments to enhance long term program execution.
Health non-GAAP operating margin for the year increased from 14, 4% in fiscal year 2020 to 18, 8% primarily from increased volume on fixed unit price programs.
Turning now to cash flow and the balance sheet on slide eight.
Operating cash flow for the quarter was $210 million and free cash flow, which is net of capital expenditures was $177 million. This was exceptional performance across every segment and enabled us to close out the year with operating cash flow of $1 3 billion, well above our guidance threshold of $875 million.
Free cash flow for the year was $927 million for 98% conversion rate without the $62 million headwind from the cares Act tax deferral, we would've exceeded our 100% conversion target for the fourth straight year.
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 and maintaining our investment grade rating returning our quarterly dividend to our 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 on slide nine before commenting on 2022, let me first closeout the financial projections, we gave at our 2019 Investor day.
FY 'twenty one marked the end of a three year forecast period, and we exceeded or achieved all of our financial targets.
For the period, we grew organically at a compound annual growth rate of 7% versus a 5% target achieved an adjusted EBITDA margin of 10, 8% versus the 10% or greater target and converted 116% of adjusted net income into free cash flow above our 100% or greater.
Good.
As we look towards 2022, there are some important factors to consider there.
No guarantee that we'll get an omnibus spending bill in February the continuing impacts of Covid are unknown and it's likely that omicron won't be the last Corona virus variants, we can't be sure how long it will take to get our two large takeaway awards through the protest cycle and we should expect that the large awards that we will receive this year will be delayed.
Through protest.
We want to take a measured balanced approach to guidance recognizing that there are significant outside forces to contend with.
With that let's walk through the drivers for each metric.
We expect revenues between 13, 9% and $14 3 billion, reflecting growth in the range of 1% to 4% over fiscal year 2021.
This growth was almost entirely be organic when balancing the remaining revenues from 2021 acquisitions with the divestiture that Roger mentioned.
To put that growth into context, let's consider the puts and takes moving from 2021% to 2022 on.
On the positive side, we have engine and some other wins that are still ramping that provide good visibility into the upside on.
On the negative side, we have about $160 million of headwind from the Afghanistan drawdown about $80 million reduction in disability exam volume and another $80 million from the human landing system program.
These were all known and discussed as of the Q3 call.
Since then a few additional headwinds have emerged.
We were not awarded the follow on to our MGA Uff's work that was consolidated into the uds procurement.
Uff's represented about $100 million of revenue in 2021 with the opportunity to more than double that amount. If we had one uds.
In addition, the customer has recently notified us that they are not yet ready to complete the <unk> transition. This program should generate about $150 million of revenue a year and the start date has now been pushed from January until September .
Finally, the multibillion dollar FA network procurement known as <unk> has just been pushed from an expected award date in Q1, two at least Q4.
Moving on we expect 2022, adjusted EBITDA margin between 10, three and 10, 5%.
The midpoint of the margin range is the same as 2021, when you exclude the $26 million MSA gain and the extra disability exam caseload and the top end of the range is consistent with the target we laid out at our October Investor Day.
We're committed to long term margin expansion with multiple levers overtime.
We expect non-GAAP diluted earnings per share for the year between $6 10, and $6 50.
On the basis of 142 million shares outstanding which is unchanged from fourth quarter levels.
Finally, we expect operating cash flow of at least $1 billion. This guidance incorporates the final $62 million repayment of the 2020 cares Act payroll tax deferral.
As you are aware there was a provision of the tax cuts and jobs Act of 2017 that went into the went into effect at the start of the year that requires us to capitalize and amortize research and development costs, our operating cash flow guidance assumes that the provision will be deferred modified or repealed. We currently estimate the impact of the <unk>.
Vision on fiscal year 2020, operating cash flow 2022, operating cash flow to be about $150 million.
Expanding on Rogers capital allocation comments, we expect to deploy a significant portion of our operating cash flow towards share repurchases, assuming no unforeseen material developments in our operating environment, depending upon the share price and timing of any repurchases. We currently estimate this could add 10 to 20.
To 2022, non-GAAP EPS of $6 10 to $6 50 range. We provided does not account for any repurchases and we'll update you all as we go through the year.
Given the industry factors that we've addressed we expect a slower start to the year with a sequential decline in revenues in Q1, which is normal for us we expect both revenues and margins to build significantly throughout the year.
Now a couple of other comments to help you with modeling 2022, we expect net interest expense of approximately $190 million and a non-GAAP tax rate of about 23%.
Capital expenditures are targeted at approximately $150 million or roughly 1% of revenues.
Before we open up for questions I would like to comment on something you will see in our upcoming 10-K filing related to a portion of our business that conducts international operations in.
In late 2021, we discovered through our internal processes activities by certain of our employees and third parties raising concerns that there may have been violations of our code of conduct and potentially applicable laws, including the CPA. We're conducting an internal investigation led by an independent committee of our board.
<unk> and have retained outside counsel to investigate.
We voluntarily self reported our investigation to the Doj and SEC.
Because the investigation is ongoing we're not able to anticipate the ultimate outcome or impact.
As we look to 2022, we recognize the challenges, but believe we are well positioned to navigate them ultimately the issues facing our industry are transitory and what remain our urgent needs for our customers and a compelling value proposition that we can offer is the largest most capable company in our industry.
With that I'll turn the call over to Rob. So we can take some questions.
Thank you will.
And that will be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions and once again Thats star one thank you.
And our first question comes from the line of Seth <unk> with Jpmorgan. Please proceed with your questions.
Thanks, very much and good morning, Hey, good morning, Seth.
Chris I think.
If I caught the headwinds you mentioned it probably.
It sounds like it adds up to maybe.
400.
<unk> 50 million or so.
For 2022, and I guess, if you could outline the places where you expect.
To be able to offset that just given that that.
By itself.
I've seen it seems like.
In the mall.
Amount of headwind to overcome next year sure Seth. Thanks for the question no absolutely I mean, we're fortunate that going into the second year of the engine program. We have really strong visibility into how that program will continue to ramp up in and kudos to our team that has just done an excellent job getting that transitioned early and now we're starting to see.
Some of the.
The project work that follows on to that program as well. So that's certainly one catalyst. We previously talked about the military family life counseling program continuing to ramp up as we transition forward.
Roger featured the thermal protection system program. There are several nice things going on within dynamics that we're excited about the <unk> program that we won in the third quarter thermal protection program. So those will both be transitioning into a growth mode. We had expected. Obviously, we are hopeful our HRP would've been a big growth catalyst for us. This year, we still expect it to be but that's.
Been pushed out for six months now and then ultimately one of the other big Swingers will be what happens with aegis.
We've modeled aegis to come in later in the year because we are.
Anticipating potentially further action by the incumbent to delay that award if they don't that potentially gives us upside on the revenue line, but that's how we've.
Positioned within the guidance that we provided today.
Okay, great. Thanks, and then maybe just to dig in a little bit more I know you guys don't guide by segment, but just for health you talked about $80 million exam headwind, but just if we thought about health of the overall level will discuss its Ben.
That piece of the business had been running so hot.
Thinking about the.
Even qualitative discussion about the overall level of growth or contraction in health.
And the level of margin pressure.
Well.
As we said, we do expect to be able to continue to grow our health business.
We have programs like dim sum that continue to ramp up which gives us a nice visibility there ultimately our HRP will be an important contributor but the 2022.
Revenue and profitability for the segment is consistent what we've been trying to position, which is we knew that margins would be coming down we had talked about potentially in the mid teen area. We're on track with that expectation.
<unk> backlog has been worked down but that particular line of business still performs excellently and we're very pleased with their performance and Theres a number of other large opportunities in the pipeline, but given the timing that we've seen on how procurements have been delayed we're just being cautious about when those procurements might come out and our ability to.
To win those and begin to execute.
Great. Thank you very much thank.
Thank you alright.
Our next question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Hey, good morning, Roger Cregg since that morning Shannon.
And then margins I might as well ask about the balance sheet then.
You both mentioned more aggressive with share repurchases.
You see that deviating a little bit from your.
M&A strategy. So how do you kind of think about that.
And what's your appetite for larger deals.
Hey, Thanks Sheila.
And good morning.
We're pretty transparent on the bigger deals were.
Not really enthusiastic about what is out there.
And we've talked about this before of course, Sheila is that we've we've done some major transactions over the past several years and we're now performing against those and our M&A is really focused on adding a capability or access to a new customer and those.
Tend to be smaller.
<unk>.
<unk>.
Barring something that really is transformative.
Our capital allocation is going to stay the way it has been which is we invest in the company.
We pay a dividend.
No we maintain our debt level and then we find a tax efficient way to give the excess cash back.
To our shareholders and of course, we've said some things this quarter that.
Indicate we have less need for that cash so.
That as you will but.
We are such a great cash generator and our ability to year over year to raise the dividend buy back shares I think is impressive and we're just saying we believe that will continue in the future.
And then maybe one on civil segment I think it declined in the quarter and it was one of the I think it was the lowest growth segment in 2021, but unlike here.
And let's say end market outlook.
Can you talk about what drives the reacceleration of growth in civil and kind of your expectations there for 2022.
Well I'll talk about a couple of things I'll, let Chris follow.
Civil is an area, where protests and program delays really hurt us.
We have a program named films, which is in protest ages was in protest the fence program at one time could have been a 'twenty One award and we thought it was a first quarter 2002, and now it looks like its a third quarter 'twenty two so as we mentioned both of them.
In my opinion, and Chris the delay of acquisitions.
I think hurt the industry across the board and for US I think civil took a major part of of the brunt of that but by where these programs are still going to happen.
So we're enthusiastic about our competitive position the customers just has to get them through the acquisition cycle.
Get awarded and then we've got to sort our way through the protest period, and we mentioned with ages, we don't know whats going to happen to ages.
Some of that upside, maybe maybe that will get resolved earlier.
But if there is another round of protest of quarter Federal claims.
It could be summer again, and then the AMA crime variant.
Capped our security detection business sort of at nominative levels, where we were hoping for a much stronger rebound.
<unk>.
Frankly in air travel and leisure and although we have seen a rebound, but nowhere near what we had hoped and I don't know here in DC will look like will come off the back of <unk>, we have our fingers crossed but.
I've said that before and there could be another variant right behind it.
The only thing I would add I mean.
Roger mentioned a few we certainly continued to see a number number of digital transformation it modernization opportunities within the civil customer set and those are tend to be bigger and they tend to take longer to get through a decision process, but we like that aspect of the pipeline, but he also mentioned SG&A and that will continue to be something that we're assuming.
Is not a growth catalyst in the near term, but positioning that for 'twenty three and beyond.
Great. Thank you.
Next question comes from the line of Matt Akers with Wells Fargo. Please proceed with your question.
Hey, good morning, guys. Thanks for that Hey, good morning.
I was wondering if you could comment on the long term five years to 6% organic growth target.
If you could give us maybe sort of a walk of whether kind of the biggest things that you mentioned in the bid.
At civil and the last question, but if you can sort of kind of bridge the gap from 'twenty two relative to where you think it will be longer term.
Sure.
Well I'll mention a couple of things I'll, let Chris.
Add but.
The defense enclave services.
If you were around the office, who we know what we're talking about in the hallways I mean, we're right up against that award and that's a.
It's just a large program.
Don't underestimate how big that program is and there is another competitor in.
So very competitive program.
And we're hoping that will be the first quarter award with probably at least a 100 day protest maybe more than that.
And so that will start to ramp.
Assuming we win that.
Later in the year and then.
Chris touched on a couple of things our HRP will start ramping we'll get a full year of Navy.
<unk> Nextgen. So there is there is a lot that can happen for us it's very very positive but here. We are in the first quarter frankly with a fair amount of uncertainty.
You saw where we are in the guide its a nice range on the guide we're going to do everything we can to get to the high end of that.
But with the CR, and omicron, and Ukraine, and everything else that's going on.
We thought positioning ourselves, where we did was the right thing to do that's right. Matt just a couple of other things I have mentioned again as we look towards that three year time horizon, especially 'twenty three 'twenty four I talked about a couple of dynamics programs. We continue to be excited about.
The positions on prototype programs that they are winning which ultimately we have every expectation, we'll turn into more full scale production programs and those could be.
The significant growth catalyst for those out years.
The return of the aviation screening market again cautious outlook in 2022, but we're several hundred million dollars below levels pre pandemic for that combined business. So far the topline goes so that could be a future growth catalyst area.
And then Roger mentioned, a couple of the big programs that we're tracking whether it be does her fans.
Yes.
And there's many more in the pipeline. So that's how we kind of think about it there is.
Several things that we anticipate over the course of this year will position us for accelerating our growth rate.
Until we can bring those things in with more visibility, we'll be cautious on the near term outlook.
Great. Thanks, that's helpful.
Yes.
And more you can tell us on.
You mentioned the issue you discovered late last year potential SEPA.
Violation anything more you can give us on the magnitude or when that might get resolved.
We wish we could but when you have these open investigations we're really.
Restrained on what we can tell you.
So.
And I think.
Pretty much paraphrased the paragraph you see in the litigation section.
In the K, but what we will tell you is when we have more to tell you, we'll let you know.
Right now it's an open investigation.
We are proceeding in sometime in the future we will have more to say.
Understood. Thanks.
Our next question comes from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions.
Hi, Good morning, Hey, good morning, guys.
Chris I appreciate all the color on the revenue bridge on the headwinds and tailwind.
You can help us quantify the impact this year.
<unk> assumed full quarter of a CR the procurement delays.
Covid related utilization any of those other headwinds that arent. The program specific numbers you just gave us.
Well, it's all kind of tied in as we thought about that we took a view of when decisions might be made on some of the new programs that we're chasing and also kind of really layering in what we saw in the third and fourth quarter as far as lower than normal activity on kind of on contract growth activity.
Sure Gavin.
Again, it's more of a point my point is we thought through our pipeline and award timing of decisions, but obviously, where we position kind of the mid point of the growth all those things considered shaved a couple of points off of where we ordinarily might've been.
Got it. So then maybe to Roger how do you think about the level of conservatism that that does.
Encapsulate kind of given how unpredictable a lot of these headwinds have been.
But it also sounds like maybe youre, assuming some contribution from ges, which could be a coin flip. So how are you thinking about the level of conservatism that you've baked in here.
We really want especially.
With everything that's going on this year.
We want to be.
And a really balanced position here in the first quarter and then as these decisions we need to get an omnibus we need to get some of these programs awarded as we can release that risk than your words, not mine conservatism I'd rather call it back.
<unk>, we can we can rebalance where we are throughout the year and there is there are just so many multibillion dollar opportunities ahead of us.
That with potential for another Covid variant.
<unk>.
I think we're going to get an omnibus, but if not I mean, there is still people in Washington, saying, there could be a potential government shutdown.
Here, we are and we haven't even had the state of the union or the skinny budget by the president So theres a lot of uncertainty here in D. C. If you listen to the radio.
And so we just wanted to be in a position where we've got a good range and we can work away up in the range as these risk items get released.
Got it I appreciate it a quick clarification to Matt's question is 5% to 6% still the right three year range or should we think of this year is abnormally disruptive and it's 5% to six after 'twenty two we haven't Kevin at this point in time, we're not changing kind of that three year CAGR outlook right.
There's lower starting point than we had anticipated given the dynamics that have played out over the last couple of months, but as we pointed too many path to continue to get there and as we.
Resolve some of these major swinger, such as <unk> and others in the near term hopefully we will be able to give you more clarification on on that three year outlook.
Got it thank you.
Our next question is coming from the line of Robert Spingarn with Melius Research. Please proceed with your question.
Hi, good morning good.
Good morning.
Morning.
Yeah, Hey, I don't know, if Roger or Chris, which one do you want to take this but we talked about 'twenty two being a bit of a transition every year revenue perspective, I wanted to try with COVID-19 .
During in the CR going into March I wanted to ask the question from a margin perspective, and you've got civil which improved a little sequentially, but still down on the security detection. How do you think about the segment margins in 'twenty, two and how does that compare to normal.
Well I'll start.
Roger might have some thoughts here to Robert I would say that we've been signaling for some time now that <unk> is running at an elevated level and that was going to moderate down I will tell you that the conversations we've been having internal to the business around the other lines of business have been about margin expansion opportunities and where are those going to come from and what actions are we taking.
As we built our 2022.
We're finding opportunities in challenging the business leaders to drive margin expansion across their portfolios and we're doing that in a thoughtful and balanced way, but but have good confidence on the levers to pull to make that a reality over time. So I think that's what you should continue to see is a little bit more rebalancing of the margins across.
The portfolio and then getting the health group.
Group to a position that is stable that we can grow off of for there and so that's that's the 'twenty two should play out for you as far as margins go in Europe .
Well go ahead to answer your question I mean.
I didn't want to interrupt you Roger.
Allowing interrupt you.
Well longer term getting back to like an 11%.
Type of number what timeframe should that be.
Well for civil if youre talking about civil specifically I mean, it gets to a 11% if there is a significant rebound across our aviation screening market right.
That's critical to that portfolio and Thats, an above average margin piece of the portfolio the volume needs to increase there as we've signaled we're hopeful at this point in time, we'll see that continuing to get to those levels, starting in 2023 and growing from there.
But the core aspects of the portfolio wouldn't be 11% without.
Decent contribution across the security products business.
Hey, Rob.
I'll make the point that I was going to make earlier.
You raised margin in our business really two ways right.
Through operating performance being more efficient scale being able to.
You spend less capital less R&D less marketing because you have size right now.
Been on that journey, and you've seen some real benefits from that.
Other way you can raise margin in our business as you change your mix alright.
We don't bid on.
Relatively low LPTA, 3% bids and we bid on highly value added differentiated programs like the thermal protection system.
But if you've got a contract that's four or five years to support emission, where youre doing maintenance operations and maintenance work.
Those things have to roll off so the portfolio mix doesn't change as quickly as <unk>.
Perhaps you would like or perhaps our investors would like and where those are good contracts and they generate a lot of cash and they help us build relationships with customers. So we have been moving over time really on both fronts operating better being more efficient using our discretionary funds better but also if you.
We'll be moving up on the.
The value chain and bidding on more differentiated work and then shying away from things that are LPTA and more commodity.
Okay, Chris what I'd mentioned, 11% I was thinking enterprise wide.
Yes, Rob while Youre challenged me today, then on 11% for the enterprise.
That was a great year last year as we pointed to 60 basis points came from a couple of items that aren't going to repeat.
We signaled 10, 5% as our long term target at Investor Day again, our expectation is to get to that level and then we'll and we do believe as Roger pointed out depending upon the mix in the portfolio continuing to pursue areas contracts work areas that will give us margin expansion opportunities from there.
Got it got it thank you Paul thank.
Thank you thanks, Rob.
The next question comes from the line of Colin Canfield with Barclays. Please proceed with your question.
Hey, good morning, guys. Thanks for the question. So just to follow up first on Matt and Gavin question.
The head count growth and kind of your organic targets that are apply FY 'twenty FY 'twenty four.
Mid single digit to high single digits can you just talk us about talk to us about the head count growth assumed in getting into the accelerated organic growth rate.
Yes, we can.
We don't really put out numbers.
<unk>.
But we obviously, we obviously have to add heads worried about nominally 43000, the exact number will be in the K maybe.
Maybe just a little short of 43 by like 20 or 30.
We have to add a significant number of people in the thousands again without.
Putting a specific number and I think your question is really more of the risk around being able to continue to attract.
People to the company.
We missed something actually as a leadership team we look at literally every week.
And when you look at the number of people that we've hired and the people who have left either the great resignation of left the industry or retired or the people that have gone to competitors and we are still comfortable with our ability to attract and retain the workforce that we need.
Another question, we usually get is about wage inflation and I'll just hit that one is that.
We have seen.
A little bit of uptick in what we're paying people, it's all based in our numbers and our guidance.
But we're also seeing the opportunity to hire some college grads.
Our lower wage rate and frankly some of the skills, we need are coming right out of college like Python programming language and so.
That allows us to bring in some earlier career people into our cost structure, which has a beneficial effect. So.
We always say that the workforce is a risk item for us but.
But we've been fortunate to create a company and a culture, where people want to come to work and and we frankly, our first six weeks of the year have been pretty impressive on the hiring that we've already done in 2022, Paul the only thing I'd add to Roger's comment needs right. It is thousands of employees, but it's not it doesn't have to grow at the same <unk>.
As revenue because some of the things we pointed to for the 23% in 2004 catalysts are going to come more on the manufacturing product side those production programs in dianetics and the return of the SG&A business market that we expect those don't require the same level of head count growth contributions to drive that revenue uplift. So.
It's a big challenge, we're focused on it but it's not a one for one relationship to get the outcome.
Got it thanks, and then with respect to the margin question kind of following up to Rob's Vanda thinking both you and CACI or assuming that you can mix shift kind of in a better work can you. Just you just talks about what sort of competitive win rate youre assuming on hardware.
Type contracts and kind of where light us competes on price versus capability.
Let's see I am not sure I, even know the number.
On hardware versus.
Digital transformation.
I'll describe just a little bit.
The acquisition process for us on hardware.
It is very very different than say some of our large digital transformation opportunities. The large digital transformations are a lot of bidders RFP process draft RFP competitive bid may be down selected two than a competitive bid on the hardware side it starts with spending our own.
Andy to create.
Our concept and investing in a prototype for a demo or a simulation.
And then there may be getting a crater like a cooperative research program, where we where you take it out in the field and we shoot a prototype and we get a customer interested in it and.
That leads to <unk>.
Unlimited production order, which can actually lead to a large production order so for us I can't speak to the other people in our industry in the areas, where we compete we're really competing off of differentiated technology that we've developed very rarely have we taken our widget against <unk>.
Body else's widget and a third party's widget and we're we're fighting it out in the proposal process, which again is typically in our large digital transformation jobs, how we win there and it's why we like some of this in our mix. If you followed our story over the long term you know.
<unk> said, we would like a little bit more product a little bit more hardware, where we can invest in a differentiation and then we can reap the benefits of that over the long term. The only other thing I'd add there Colin is on the differentiation differentiation front. The other attribute that allows us to be successful with speed and we've talked about that but we're more <unk>.
One more agile and so sometimes as we're looking at positioning for emerging capabilities, our ability to get that.
<unk> delivered and fielded more quickly because we can respond more quickly as the characteristics that allows us to be successful. Yes, just an example, there.
As you can tell that we're really excited about this part of our business.
We had a customer who needed an airborne asset and we went from concept to delivery within 12 months.
So we bought the airplane monitor airplane, we put equipment in the customer and gave us. Some GSE. We went through a test program, we got and fielded within 12 months and that yes.
Speed security and scale, we think is one of our differentiators.
Thank you.
The next question comes from the line of Mariana Perez Mora with Bank of America. Please proceed with your question.
Okay.
Good morning, everyone. Good morning.
No.
124%.
Charles.
Steve content.
Most parts and you could get to the mid single digits growth in the next three years and this is not normal.
Macro environments. So in other words given this.
Sunpower design environment why not on their partners.
Sure.
Well, we're only giving 'twenty two guidance today right and so we're trying to make sure that based on the factors we've seen Mariano over the last four months it reflects.
Those challenges that we see but at the same time.
We also see these needs.
And these.
Opportunities in the pipeline and so as we sit here today, we look at where our customer is going the things that we think ultimately they will be buying in the demands that they have and the funding levels that we believe will be there still give us.
The ability to achieve that longer term.
Aspiration that we have for growth, but for right now 22, Youre right. It is a little bit more of a cautious start given the uncertainty in the environment today, but we tried to paint a picture of how that could increase our growth rate over time, depending upon how some of these uncertainties.
Resolve themselves and Mary.
We've talked about this in the past as we have been trying to position the company to where we think the puck will be in the future. So.
As we look at the omnibus, we think theres going to be an even greater growth in non defense, so that will benefit us and our health and civil business, which we have bolstered over the past several years and then within defense the shift to great power competition, which we think benefits things lie.
<unk>.
Space and hypersonic and electronic warfare again areas that we have been positioning now for years and so we're enthusiastic about the long term.
In first quarter of 2022, there's just a lot of risk that needs to be retired which is why we are where we are.
Thank you and then could you please discuss on competitive dynamics car, we raise some pricing pressure being affected.
Today, our current also doing the scale and scope strategy.
Competitive dynamics, so I would say that.
It is.
The same competitors that we go up against typically.
And we're we have a <unk>.
<unk> team and leading our business development, great capture managers, a good price to win team. We think we have a good pulse on what each procurement competitive set looks like and so each one is different.
<unk> earlier point, we do try to steer away early in the process and our pipeline of things that we believe are only going to be base.
Based upon a price oriented decision thats, not where we want to compete with.
But clearly I mean, the market is always competitive and we approach it that way. So this is no different we're not taking our eye off the ball. We always go after everything anticipating that it's going to be highly competitive we need to put our best foot forward and so that's the way we've been prosecuting the bids in our pipeline.
Thank you very much.
And Rob it looks like we're coming up to the top of the hour I think we have time for one more question.
Yes that question will be coming from the line of Tobey Sommer with <unk> Securities.
Thank you I was wondering if you could give us a perspective on the proportion of your business up for Recompete. This year and next and how that may inform the aperture of that you have in year <unk>.
Development pipeline to look for new and takeaway work.
Hey, Tobey this is Chris and Roger can add some more color I would say, it's actually a lower than normal year in 'twenty, two and so that kind of informs our.
Our internal goal on what we think our book to Bill would needs to be and what our target is so absolutely.
The increased percentage of takeaway and new business opportunities that we're going after.
And that comes with lower expected win rates. So we have to be very thoughtful about the volume that we're prosecuting through and certainly we don't take our eye off the ball on any re competes and put our best foot forward, but it is a lower than average year, which which is great. So we are definitely more on the attack in 'twenty two than we might ordinarily be.
Would that hold true for 'twenty three as well.
I would tell you that we haven't probably broken that down with great visibility yet I mean, there is not one of our top 10.
10 programs that come to mind that are coming up for Recompete cycle next year, so but more color on that as we get our way through the year.
Okay. Thank you.
Yes.
Thank you I'll now turn the floor back to management for closing remarks.
Thank you Rob for your assistance on this morning's call and thank you all for your time. This morning, and your interest in <unk>. We look forward to updating you again soon have a great day.
This will conclude today's conference. Thank you for your participation you may disconnect your lines at this time.