Q1 2022 Leidos Holdings Inc Earnings Call
Greetings and welcome to <unk> first quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Stuart Davis, Senior Vice President Investor Relations Stuart you May now begin.
Thank you, Rob and good morning, everyone I'd like to welcome you to our first quarter fiscal year 2022 earnings conference call joining.
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'll 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.
Our first quarter marked a strong start to 2022 with record levels of revenue backlog and backlog stemming from our leadership position in the government technology market. We continued to build our reputation and track record of performance and digital technology, cyber and innovation innovative systems.
Across our diversified resilient business portfolio.
Our strong first quarter results and the improving federal budget picture increase our confidence in delivering on our full year financial commitments.
I'll organize my remarks around four messages first our financial results demonstrate our ability to meet our commitments and outperform the market.
Second our business development results are a testament to our differentiated position in the market third our consistent capital allocation approach drives shareholder value and fourth we're able to attract the workforce, we need and develop them for long term success.
Yeah.
Number one our financial performance was strong at both the top and bottom lines revs.
Revenues of $3 49 billion were up five 4% in total and up four 4% organically year over year, which is once again towards the top of the market non.
non-GAAP.
Diluted EPS for the quarter was $1 58, with an adjusted EBITDA margin of 10, 2%.
All three metrics were ahead of our plan for the quarter.
Finally, we generated $93 million of cash flow from operations and free cash flow of $65 million, we remain on track to generate more than $1 billion of operating cash flow this year.
Number two business development sustained the momentum that drove our industry, leading organic growth last year.
We achieved net bookings of $5 4 billion in the quarter, representing a book to bill ratio of 1.6.
As a result total backlog at the end of the quarter stood at a record $36.3 billion, which was up 11.6% year over year.
The awards in the quarter were rich in new business and takeaway is balanced across our three segments and conscience and concentrated in key capability areas, including digital transformation and cyber.
In civil two large awards successfully completed lengthy protest we won that two and a half billion 10 year advanced Enterprise Global information Technology solutions, where agents program, where we will provide communication data center cloud and cyber security services.
Across all of masses centers and facilities.
For the FAA, we'll continue our more than 20 years of support on the National Aerospace systems integration support contract.
The new Nitschke contract is a single award idea in Q with a $1.7 billion ceiling across 10 years.
Our working competences strategic and transition planning flight procedures security and safety data analytics and unmanned aircraft systems in support of air traffic control modernization efforts.
In health, we won two multiple award I D iqs totaling about 1.7 billion over six and a half years to provide disability examinations for the veterans benefits administration.
The first was a recompete for pre discharge exams in the United States and the second is a new area for us exams outside the United States. Although we will have more competition within our legacy business were excited about the opportunity to expand internationally.
In defense solutions, our Gibson Cox subsidiary, one or $319 million five year old Ward for ship design Engineering services for the U S. Navy's future surface combatant program.
We won two new cyber programs totaling $340 million focusing on agile secure Dev ops, cyber inspection and assessment continuous monitoring and audit and security management services. We also had a takeaway win on $100 million single Award <unk> IQ.
To modernize the Army's gunnery training simulation systems.
This work serves to enhance readiness across the operational spectrum in support of National Defense.
And the biggest most impactful win for the quarter is not included in our bookings we were awarded 11 and a half billion defense enclaves services contract by the defense information systems Agency.
The jazz contract is a 10 year digital modernization program focused on consolidating common 19th services into a single service provider framework.
As expected. This award is now in protest with a G. E. O is scheduled to decide in mid June .
One of the keys to our BD success is our strategic partnerships, including with Amazon Web services I am proud that <unk> was awarded the AWS 2021 public sector consulting partner of the year.
AWS recognized light OS with this honor because of our deep technical partnerships in areas such as edge to cloud and next generation digital infrastructures to build solutions that drive digital and cloud transformation.
This recognition illustrates the value of the lightest Alliance partner network, which we founded in 2018 to deepen relationships with the most important vendor partners across our business groups.
This network has fostered greater collaboration with partners to drive technology innovations and continues to be a differentiator for lighters on a wide range of proposals and programs.
Number three I view capital allocation is one of the keys to creating shareholder value.
Last quarter, we talked about a greater focus in 2022 on share repurchase and we followed through with a 500 million accelerated share repurchase.
We sit near our target leverage ratio and our ability to generate cash gives us significant firepower for further capital deployment.
We're well positioned to grow and we will continue to look for technology add ons and strategic initiatives that bring us differentiated capabilities for customer access.
We will pursue large M&A only for a company that truly accelerates our strategy.
Number four.
People are at the heart of what we do in this quarter, we have hired more than 2600 people.
One reason people are attracted to light OS is that we enable our employees to build successful careers.
We regularly review talent and planned development actions at all levels of the company.
This quarter, we made several key moves at the executive leadership team and board levels were.
We're pleased to welcome our new Chief Human Resources Officer, Maureen Waterston, who brings an impressive background and skill set to the lightest team.
Her excitement and commitment will enhance our people experience here at light us with.
It was about 1600 funded vacancies and an industry wide shortage of cleared technical talent recruiting and retention remains areas of strategic focus.
He will lead our human capital strategy and continue shaping the employee journey at light owes to our lightest life initiative.
Dave King has decided to step back from his role as Dianetics group President he.
He will continue in a consulting capacity, ensuring a smooth smooth change to new leadership and advising on matters of strategic importance I want to thank Dave for his outstanding contributions, thus far and I look forward to working with him in his new capacity.
[noise] Jeopardy, Steve Cook and stepping up as dynamics group President.
Steve's expense extensive experience and background, both with dynamics for 13 years and leading critical programs for NASA before that have prepared him well for his new role.
Hill team with Paul and Golar as as J P. D. In addition, Paul will lead the National Security space business for White House with a focus on space surveillance missile warning and space situational awareness.
Next our digital modernization business is growing rapidly with an expanding portfolio of differentiated technology.
To meet the demands of our growing business, Steve Hall will move from his role as CIO to lead the enterprise and cyber solutions operation within the Defense group.
We've moved our CIO team under Chief Technology Officer, Jim Carlini to tightly align our technology and CIO capabilities.
Finally, Pat Shanahan has joined our board of directors. He served at the highest levels of government, including Japanese Secretary of defense and acting Secretary of defense and industry, including more than 30 years with Boeing where he led supply chain and operations.
Commercial airplane programs.
And many other relevant areas while at D. O D. He was a passionate champion of digital and technological advancement for the department driving modernization cyber security AI and cloud computing as well as command control and communication.
Patched well tests expertise offers tremendous benefits for our shareholders and customers.
Before turning the call over to Chris I'd like to address the current congressional budget environment.
Since the Q4 call Congress passed the fiscal year 2022 omnibus spending package funding the federal government through the remainder of the physical year with 782 billion in defense spending a 5.6 increase from fiscal year, 'twenty, one and 730 billion.
Nondefense spending a 6.7 increase from fiscal year 'twenty one.
The budget also includes 14 billion, an emergency supplemental spending in support of Ukraine, given the devastation at the hands of the lessons.
It will take time for the new budgets to work their way individual programs and new opportunities, but this provides positive momentum for the back half of 2022 and into 2020 three.
President Biden has also released his 5.8 trillion physical year 2023 budget request.
This request includes 813 billion in defense spending and 769 billion in non defense spending.
In addition to kicking off the physical year twenty-three congressional budget process Congress remains focused on finalizing a 10 billion dollar bipartisan COVID-19 relief measure and passing legislation to increase American competitiveness with China.
Congress also continues to grapple with rising inflation rates strained energy markets supply chain issues and the conflict in Ukraine.
In our club and closing our thoughts are with the people of Ukraine, and our colleagues who have family and friends in the country.
The United Nations estimates that more than 11 million people are just placed to help those impacted we've made a significant donation to project hope to mobilize emergency teams and send medical supplies.
The people of Ukraine have lost infrastructure that will take lifetimes to replace when the war ends it will only be the beginning of their struggle.
I'll now turn the call over to Chris Cage.
Thanks, Roger and thanks to everyone for joining us today.
As Roger said Q1 was an outstanding quarter across the board and I'm proud of the team for delivering such strong operating performance.
Jump right into the first quarter results beginning with the income statement on slide five.
Revenues for the quarter were 3.49 billion up five 4% compared to the prior year quarter.
Revenues grew organically across all three reportable segments, given robust hiring in high labor utilization.
Adjusted EBITDA was 358 million for the first quarter, which was down 8% year over year and adjusted EBITDA margin decreased from 11.7 to 10, 2% over the same period.
Adjusted EBITDA was down primarily as a result of the $26 million net benefit related to the mission support Alliance joint venture recorded in the first quarter of fiscal year 2021.
As well as it returned to more normative indirect spending levels as we move past the pandemic.
non-GAAP net income was 223 million for the first quarter, which was down 10, 4% year over year and non-GAAP diluted EPS for the quarter was $1.58 down eight 6% compared to the first quarter of fiscal year 2021.
Interest expense was up $3 million year over year with the additional borrowing to fund the Gibson Cox acquisition, and the $500 million accelerated share repurchase.
The non-GAAP estimated tax rate was 21, 2%, which was in line with our expectations for the quarter, but below the projected 23% for the year.
The weighted average diluted share count for the quarter was 140 million shares compared to $144 million in the prior year quarter.
Now for an overview of our segment results and key drivers on slide six.
Defense solutions revenues increased by four 6% compared to the prior year quarter, the largest growth drivers, where the N Gen and if pick ramps, which more than offset the completion of the human landing system based contract within dianetics and the end of our Afghan support contracts.
Defense solutions non-GAAP operating margin for the quarter came in at eight 1%, which was down compared to the prior year quarter as the result of higher investments on developmental programs.
Civil revenues increased three 8% compared to the prior year quarter.
The revenue increase was primarily driven by volume growth on existing programs, including the support to Hanford and the FAA as well as our engineering support to commercial energy providers.
Civil non-GAAP operating income margin was seven 7% compared to 12% in the prior year quarter. The decline in segment profitability was primarily attributable to the MSA gain in the prior period as well as a write down taken on our minority interest joint venture program.
Health revenues increased by 10% compared to the prior year quarter, we continue to benefit from the ramp on the military and family life counseling program and Dim-sum had a large year over year increase based on deployment timing.
non-GAAP operating income margin was 19, 2% compared to 18, 6% in the prior year quarter the.
The improvement in segment profitability was primarily attributable to efficiencies introduced into procurement and delivery on certain contracts.
As we've discussed previously we expect health segment margins to land in the mid teens for the year.
Turning now to cash flow and the balance sheet on slide seven.
Operating cash flow for the quarter was 93 million and free cash flow, which is net of capital expenditures was $65 million. During the first quarter, we returned $577 million to shareholders principally through the $500 million accelerated share repurchase program that we put in place two days after our February earnings call.
We were immediately able to retire $4 5 million shares the.
The program will end within the next two weeks and if our share price remains relatively constant with where tire. Another few hundred thousand shares at that time.
We're funding the ASR with the combination of cash on hand, and proceeds from the issuance of commercial paper.
When the Russians invaded Ukraine. The C. P market became more volatile. So we sold some accounts receivable for short term liquidity. Since then C. P markets have cleared and we've exited the AAR monetization by quarter and so there was no impact on cash flow for the quarter.
At quarter end, we still had about 75 million of borrowings outstanding through our commercial paper program.
As of April one 2022, we had $297 million in cash and cash equivalents and $5 1 billion of debt. 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.
<unk>, we're turning 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.
As shown on slide eight we're maintaining our guidance for fiscal year 2022.
Specifically, we expect revenues between 13, 9% and $14 3 billion.
Adjusted EBITDA margins between 10.3, and 10, 5% non-GAAP diluted earnings per share between $6.10 and $6.50.
And cash from operations of $1 billion or greater.
With three quarters to go we believe the current ranges still encompass the likely outcomes for the year.
That said I'll offer a few comments to help with modeling.
On last quarter's call I mentioned, a range of EPS benefits from share repurchases. When we were implementing the plan our stock was trading in the mid eighties. We're now forecasting a volume weighted average share price of around $105. In addition, with world events interest rates have risen and liquidity has tightened which has increased borrowing cost.
Given these factors we're now projecting the addition from the Q1 ASR program to be closer to 10 cents than 'twenty.
In addition, we see the current environment is favorable towards growth and we're exploring multiple opportunities. We're prudent investments could pay long term benefits to <unk> and our shareholders. These increased investments may come in business development R&D and program execution.
Finally, as Roger mentioned, we remain on track to generate $1 billion of operating cash flow.
As is our usual pattern, we expect the lion's share of operating cash flow will be generated in the back half of the year.
We still believe that Congress will retroactively delay implementation of the new tax research cost capitalization rules give me the number of members from both parties, who have co signed legislation to restore pro innovation tax policy before the end of the year. However, if we were to amortize.
Research costs and pay the taxes currently required our operating cash flow target would be lower by approximately $150 million.
With that I'll turn the call over to Rob. So we can take some questions.
Thank you well now be conducting a question and answer session.
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One moment, please while we poll for questions once again Thats star one thank you.
Thank you our first question will be coming from the line of Peter Arment with Baird. Please proceed with your question.
Yeah, Good morning, Chris Hey, good morning, Peter.
Hey, Roger maybe you could talk a little bit about.
Are you seeing the.
The fiscal 'twenty two our inactive came in in and certainly the outlook for 'twenty three.
Uh huh.
Even better.
Talking about the longer term budgets.
Kind of in the context of how you think our lightest is faring there and when I think about just also the dynamics business can you talk a lot about the program of record the outlook. There. If you could give any kind of insight and is there any potential benefit from activity in Ukraine. I know you do have some area of defense type products.
Thanks.
And Peter you broke up in the last sentence or two.
Just regarding Ukraine, yeah, Okay, great is there any opportunity there and when you you know I know you have some.
Yeah, well I mean, let me talk in general.
First of all on on Ukraine.
Yeah, we're probably seeing higher op tempo and our defense sector because of support that the U S is giving to the effort and the supplemental spending but that being said you know the conflict.
I think long term is probably bad for the industry.
No.
War, we're not in the business of war, we're in the business of providing a deterrent.
And so I think it's yeah, we will spend money now, but we will take it away from the future and I think it's also kind of bad for the country.
Certainly bad I think for Europe , and I think it's really bad for the global community. We're seeing you know.
More stratification of nations and going back to a tri polar world and I'm not sure. That's that's really good for anyone that being said, we probably work more overtime, which man you know our costs probably went down because we've got more direct labor that we didn't plan for <unk>.
And yeah, there are some programs.
That appear to be accelerated because of <unk>.
Some of the emerging threats that were used in Ukraine hypersonic. She comes to mind, but we have the enduring fires program, which we expect to be a fully supported and then to the extent that you know anybody's in the weapons business and we don't have a significant weapons business, but.
Some of our peers.
Makes juniors and switchblade and traveling and things like that and those inventories and that stock will have to have to be replenished I think.
Oh, the broader view is.
Every time I think we as a country get comfortable that we can lower the defense budget. Because if you will you know pieces broken out across the world. We we learned that the world is still a very complicated place and we ended up.
Having to put the money back in the defense budget. So I think the long term prospect is that we will see a strong defense budget for the foreseeable future.
And what's especially.
Good for us in light US is as the defense budget has moved up there now seems to be almost like an iron bar both between the defense side in the civil side. So we rarely now are seeing increase on the defense side without a commensurate increase in the civil side, which really provides us a benefit across.
All of our segments and so no I I I I will you know as a as a citizen as a taxpayer I worry about the national debt and I worry about balancing the budget someday and all of that but from my position as CEO . This has all been a real positive for the company and for a light OS and the strategy there.
We implemented which was to be able to address the broad markets within the federal government and some of the international government. So.
As I said in my comments, you will see the money start to come through the P. P. B S system in the second half of 2022 and then you know 23 looks like it's going to be another strong year on both sides and frankly, 'twenty four and we'll follow up.
I think we're at.
A place relative to government spending that's going to favor our industry. So thanks for your question Peter.
Yeah.
Thank you.
Our next question is coming from the line of Sheila <unk> with Jefferies. Please proceed with your question.
I'm wondering now with you Chris. Thank you good morning, Hey, good morning Sheila.
Good quarter, Chris you mentioned in your comments.
Investment in program execution investment it wont be but Mr. Gacek program with that or is it broader and just in regards to profitability for the year you know.
You're seeing costs come back, but how do we see the cadence of profitability does it step up from Q1 levels right. Thanks, Sheila So it's more than a singular program. In fact, it just been a variety of opportunities and we encourage our teams to be creative and bring forward business cases, where they see opportunities that could be.
Lead to you know longer term pay offs and we've seen a number of those opportunities. Some on programs that we're performing on that we're all in to make sure we deliver on time and on schedule.
And on budget and so we believe those of those performance on those programs will lead to future opportunities with those customer sets. So that's one example, but there's also areas where we see next generation of certain technologies that we want to continue to invest in because we believe the demand will be there.
As it relates to the pattern of profitability through the year, we always had an expectation that that would build.
As we progress through the year for a variety of factors some of which just the timing that we have visibility into program performance product deliveries are a little bit more back end loaded over the course of the year programs like Navy Nextgen, which has been ramping up very nicely. There is more project work now that we're into that program six plus months in the <unk>.
<unk> sees opportunities as we move to the back half of the year to continue to deliver for the Navy customers. So so again I think the pattern with some modest increases over the course of the year and.
And you know that will counterbalance some of the things that we're seeing in health, where the margins were a little bit inflated in the first quarter as you saw but as far as the close on your indirect spending question. It's not a surprise to US you know, we we certainly anticipated getting back being on the road being involved with you know trade shows as necessary.
And so as we built our pricing rates for the year, we certainly incorporated those expectations.
Okay. Thank you.
Thanks, Sean.
Thank you. Our next question is coming from the line of Cai von <unk> with Cowen. Please proceed with your questions.
Yes.
So much so so like khaki you guys had a weak funding to sales in the quarter per se 0.9.
Although your trailing 12 of one point out one is stronger can you give us some color on the cadence throughout the quarter in terms of funding and whether it's picked up here in April and they are following on to that maybe some help.
<unk> help in terms of the cadence of revenues and earnings over the next three quarters.
Sure Kai so advair.
It varies on the funding and right now I would tell you other than one particular example that comes to mind, where we wish there was a little bit more immediate funding on a particular program with one of our customers funding hasn't been an issue in some of the orders that we won most notably on the VBA contracts that funding will be there over time, it's just the way it gets record.
So we don't see funding as an issue and in fact, we're starting to see some customers come to us and say I'm anticipating more funding being available on these particular programs you know what types of things could we potentially do so that's the way, we're seeing things play out and I'm sorry. The second part of your question was on the progression of our revenue and earnings.
The progression of revenue and earnings over the year.
So it's a it's a modest uptick as.
As we see the year playing out obviously, we just got started Roger talked about our Aegis Awards program. So there was really no contribution of that in the first quarter that'll start to contribute more in the second and build through the second half of the year. There's obviously some other new start programs that we just talked about one of the key variables will be within health and how we see the exam.
Paul you're moderating, but we certainly anticipated that coming back down to the more normative levels that we've discussed so think about you know steady uptick in the run rate with the growth rate will moderate as you know the back half of last year. It was a little bit stronger so you'll see those growth rates dialed down and I think margin profile will continue.
Modest increases over the course of the year.
Hey, Kai I would add on on the funding side when when we started some of these very very large programs getting the you know the.
The the billing process, where we aggregate bills and getting the contracting officers and that whole process to work as smoothly as it will on our mature program takes us a couple of cycles and so it's not the available funding at the customer level, it's getting the process.
Submitting invoices aggregating invoices working with contracting officers are some of which are new to us because these are new programs and just getting that process are to operate as efficiently as we do on our more mature programs. So we expect as the year goes on that you'll see that reverse.
Yeah.
Thank you.
Thank you.
Our next question comes from the line of Robert Spingarn with Melius Research. Please proceed with your questions.
Hi, good morning.
Hey, Rob.
Roger I wanted to ask on the SBA business, where that's running and if that's improving with the traffic recovery I think it was may it may be trending at about I don't know, 60% of where you where it was when you acquired it.
Hum.
Let's see there is more proposal activity.
And we're out on the road more we're engaged with customers more but like any acquisition process. When you you essentially come to a stop getting it started again. So there's you know there's a R F I.
As an RFP cycle and it just it just takes time.
Air traffic.
In the U S is at or better than international is still lagging and then in certain regions, they're still lagging but our team is traveling again and in fact, our group President has been overseas.
Talking to airports and the airports are now coming forward with new forward plans post COVID-19.
Which will include a modernization of both checkpoint baggage and and you know we've been investing in technology, we're trying to get to a touchless passenger experience.
Which I think is kind of the Holy Grail of all of US who want to go through airports, but that's just going to take time.
So the recovery has been slow and it's going to take us well into 'twenty three before we get back.
Okay, and can you remind us what the domestic versus international.
What is in that business and then Chris I have a quick one for you.
I mean, Rob I I I don't know that we've given a precise estimate of that because it you know it ebbs and flows right where the demand signal comes from and the service but.
So these days, it's less internationally focused a little bit more domestically focused but to roger's point, where we see that bounce back in that future demand will be more internationally focused when that does occur.
I probably should have asked it is installed base, maybe that's the better way to think about it.
Oh gosh, we're in a test is now more internet more installed base internationally.
Okay, and then and then Chris just on backlog how much of that is fixed price and to what extent do those contracts have.
Annual escalators like CPI or ACI.
To protect a bit.
Well the.
The large awards and health this quarter are like a fixed unit rate pricing and by and I would tell you while we don't have.
Necessarily escalator protection, we spent a lot of time in our pricing build in there.
The floor rates and oftentimes those are prescriptive assumptions by the customer in a things TV and you have an opportunity to revisit that but we you know we take that estimate of inflationary cost increases into consideration when we're building up our price point.
As far as the overall you know our fixed price.
Concentration hasnt moved much as a percent of revenue. So you know you're kind of seeing the new orders come in along the same lines of what we've seen historically.
Okay. So no real change to your long term margin expectations from inflation.
No not at this time, where we're doing the best we can to combat that as we price new opportunities and and having a still more than 50% cost plus mix of the portfolio. Certainly gives you. Some backstop installation, but were certainly being thoughtful about pricing that are fixed price components of the new bids.
Sure. Thank you.
Yeah.
Our next question is coming from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions.
Hey, good morning, Kevin.
Maybe just a follow on the inflation question no. Roger a couple of quarters ago, you made the point that if the customer doesn't.
Necessarily or the customer will lose purchasing power if they don't raise their budgets for inflation.
It seems like now we have a placeholder for inflation and the Dod's fiscal 'twenty three budget. So is it your sense that the government customer is cognizant of the inflation environment. Both in terms of you know real purchasing power and cost inputs.
Well, let's say.
Hard for me to judge whether it's a government customer writ large.
You know understands the complete impact of inflation versus a real growth in their budget.
You know certainly a variety of customers that we talk to and and I would point out Kevin the fuel cost is an immediate problem for say the department of defense, especially as they have increased op tempo and you know they they have to buy the fuel it comes out of a working capital fund in.
So there are.
Hum.
A variety of things that are happening in the macro economy that are going to tap.
Tap down sort of the enthusiasm on the topline increase.
And I think my view is is that are you know at the SEC Gov that checked off level they completely understand that.
I don't think they're going to get supplemental for inflation I think that they're thinking through the impact to the overall budget as they look at 23 and 24, but.
I also.
I'll just share with you what the rhetoric is around town.
Town here in Washington is that.
We will not sustained inflation at this range is as we come out of the back of the pandemic as we get to whatever normal is in Ukraine.
Inflation will come down maybe not to pre COVID-19 levels, but won't sustain at this level and I know, there's a lot of focus on quarter by quarter These numbers, but the.
Economic.
Congress that I talked to and.
The reports that I am reading are that this will temper over the next quarter or two back to a more normal level, which will give them a little bit more real topline.
Okay I appreciate that insight and then maybe just in terms of reiterating guidance.
It seems like you know you're you've derisked a lot of the risk factors that were originally in place when you when you guided.
Could you talk a little bit about kind of what the moving pieces arent that would take you towards the higher low end of the range for the year, Yeah, I'll start and then Chris can add I mean, what we said is we're still within the range that we have put out in the marketplace. Although there obviously.
Pluses and minuses and I made a comment in my prepared remarks.
A lot of risk has been retired and we have more confidence in our ability to meet our numbers for the year, but it's the first quarter. There's a lot of uncertainty I don't know what's going to happen in Ukraine.
And you should take away is that we're still bounded by our guidance.
But the team here is certainly a lot more confident than we were when we talked to you at first quarter. When we didn't have a budget. We didn't know about defense enclave services, we hadn't gotten out of the ages protests. So there's a lot of good things going on from a forecast standpoint within light us but were still.
Clearly within our upper and lower bounds in our guidance range, Yeah got it and that's certainly you know the.
The thought process that we went through right and you know we're a lot we've learned from last year things could evolve a.
The speed at which we think the positive budget environment flows through to orders you know, we'll have to watch that carefully over here in the next couple of months.
There are some exciting new programs that we're we've been bidding on and so depending upon those decision timings over the next two to three months can certainly be positive catalyst for us but at this point in time, we're on a nice trajectory. We're still in we believe the overall ranges for the year and so it was premature to think about changing that at this time.
Makes sense. Thank you alright, thanks, Ken.
Okay.
The next question comes from the line of cessation of J P. Morgan. Please proceed with your questions.
Hey, yeah, thanks, very much I'll get good morning.
Yeah.
So just wanted to start off with with health and.
The profitability, there and you know.
I know that that kind of nearly 20% is not necessarily a normalized margin, but it's you know it's.
It's better than what was a very high margin last year I guess.
How should we think about what's going to cause that to decline saw there was a win on the medical exam contracted in the quarter, so you'd probably have a little bit more visibility there.
Where medical exam down year on year, and and the margin rate still went up.
And if so kind of what drove that and do their drivers gives you an ability to maybe sustain something that's closer to high teens.
Yeah, So let me start and Roger.
Pile on so.
So for the first quarter.
Featuring the exam business as the primary driver for strong margins I mean, I have to give it to the dim sum team, they're just doing an excellent job and we saw again as they've deployed more they're seeing more efficiencies and we talked about procurement.
And delivery in our prepared remarks, how were delivering software for the customer finding opportunities to get more efficient in doing so so that one really helped contributed in the quarter that was a little bit of a one time pick up but actually it will help us on an ongoing basis maintained a little bit higher margin profile there the exam business.
It is doing well I mean, I would say largely.
You know about the same levels of where we were a year ago and I think if you. If you read carefully our prepared remarks, we talked about two things number one we're excited to have won a position internationally, which provides opportunity to expand that business and an area. We haven't been before on the flip side.
On one of our regions one of the areas. We perform on we were re awarded that contract, but they also added a couple of additional suppliers potentially to the mix. So we don't know how that dynamic will play out as far as.
How the case load gets distributed there. So that's certainly an area that we'll have to watch and moderate.
And could potentially we're anticipating we will put some downward pressure on margins over the course of the year, but we'll have to wait and see yes, I'll just add a little bit of color. So the the number of exams do we do you know per day per week.
Maintain strong through the period the discussion that we've had with the customer.
Is there is a potential this year and next year that they will go back and review.
So what they called prior presumptive cases things related to agent Orange and some other things that might sustain the volume.
In the exam business sort of above what we have forecasted.
We've had those discussions with the customers we haven't seen the volume come all the way through yet so it's a bit of wait and see and on the district six which is your transition exam. When you leave the active military and you go to V. A.
They added.
Another actually added two more contractors because of the anticipation that there will be added volume through this presumptive cases.
And we can talk more about it as the quarters go by but it's really really important for our customer to provide a timely medical exam to the people who serve the country and so they wanted to add more capacity into the system because they think they'll have more exams and we'll just have to wait and see how it plays out.
Okay. Okay. Okay, great. Thanks, and then just as a quick follow up.
And it seems like the company is in a pretty strong place with regard to the revenue outlook for the year with regard to the margin guidance. It seems that the margin rate shed.
Expand through the year.
But it helps us probably at an unsustainable level in Q1, and you talked about some more investments.
And so what's kind of the driver of it.
And improving our margin rate.
Yeah, there's a variety of things Seth I mean, well first of all on the investment questions. If you know we see smart investments. We believe for the long term you know we're going to fund those even if they were over and above the plan, but as of right. Now obviously, we are holding to our guidance.
I talked about you know some of the product deliveries, although as Roger alluded to the SBA business is not where we ultimately hope it will be were still shipping some products and those are more backend loaded over the course of the year, we'll be ramping up some new program wins that scale will continue to increase the N. Gen project work is backend loaded and some of the projects that dynamics.
Working on delivering we're anticipating a better performance over the back half of the year. So there's a variety of factors across the portfolio. We're not far off obviously at 10, 2% margin, we're not far off of what our goals are but you are right and we're preparing for health moderating down in the other parts of the portfolio monitoring up a little bit this year.
Okay. Thanks, very much thank you.
Yeah.
Our next question is coming from the line of Susan <unk> with Stifel. Please proceed with your question.
Good morning, Hey, good morning, Hi, Bert.
So following up on the S. DNA question. Roger You said last quarter normalization was something in the ballpark of several hundred billion dollars higher.
So you can see.
To or greater than a two point or.
Organic tailwind for that business heading into 2023, because you're not.
And without doing the math in my head.
All bounce back overnight right, we're not expecting that we'll get a step function increase, but that's where we think we'll ultimately be able to get back to them.
Okay, and then just a quick follow up can you just give us an update on where things stand with the hypersonic business.
Sure.
We make the common hypersonic glide body down dynamics in Huntsville, and we have delivered our first our lightest manufactured.
Common hypersonic glide body into the customer and we are ramping up production I can't share what the production numbers are up.
But its a fairly steep ramp the program is fully funded.
We also won we've talked about this in the past the thermal protection system contract. This is a coating that goes on the outside of the common hypersonic glide body, and so where we're producing and manufacturing the thermal protection system and I wont say this we have ample capacity to.
<unk> raised our rate significantly above what were contracted for and then we also makes the launcher.
Which is more associated with the parent program the long range hypersonic weapon.
And we have delivered our first tranche of launchers, and there with the army doing training.
And we're in a position to build additional launchers.
As those contracts get written but we're.
We're excited about the program, we believe there's a huge near term need in and although we're conservative in what we put in our financial forecast, we clearly think there's upside on the hypersonic business yeah.
But we're really excited about the team is doing a great job in fact, Roger myself a few other executives are getting on a plane later today to fly down to Huntsville and.
Celebrate some of the recent successes they've had because they're really knocking it out of the park.
Thanks, Roger and thanks, Chris.
Yeah.
Our next question is from the line of Matt Akers with Wells Fargo. Please proceed with your questions.
Hi, good morning, Thanks for the question guys.
To ask about.
Morning, I just wanted to ask about that.
And I realize that.
That program is still under protest, but doesn't mean that does come back to you.
Later this year, how should we think about.
The pacing of how fast that could ramp up and ultimately what's sort of the run rate. We should expect on that program, yeah, well I'll give you an overview and then.
Chris can sharpen our the numbers part of it.
We're in protest where.
Optimistic that the G O rule on time.
It clearly could go to another round of protest should go to court of federal claims.
But it is a very slow ramp so let me let me describe the program is this is dish taking over more I T environments to come to if you will a common network approach across across D. O D and so we.
We will transform networks of other D O D agencies outside of the services and this happens kind of agency by agency basis. So the first couple agencies that we will transform our relatively small so if we cut.
Out of a protest in June the revenue this year is very small.
Almost double digit, but not much more than that and then it builds over time.
I would caution.
Dividing 11, and a half by 10 and putting a $1 billion in your model, we have to win and achieve that I mean, there is a potential to do that several years out, but it's not at that level in our models.
It's smaller than that and you know that's an idea IQ ceiling, if you're familiar with how that contract works that gives the customer.
A room to grow and just spend at that level, but from our own internal modeling it will be a slow ramp and will actually take years to become.
A significant program at that level, Yeah, I mean, Matt I'm, probably going to Dodge your question even more.
Obviously, we don't Wanna get ahead of ourselves very excited too to get the win notification have a high degree of confidence in our team. They know how to defend protests and so you know we're going to go through that process are we going to see what happens in June and to Roger's point I feel like this is a program that will continue to drive growth for.
For multiple years. So that's the good news and we will do everything we can to.
Deliver for the customer maximize the value of the contract because that means we're really delivering great capability to up to 22 agencies within the D. O D for the state, but you know think about this potentially it will become we believe one of our top programs, but don't expect that in 'twenty, three and probably not in 'twenty four it will take multiple years to get there.
Got it. Thanks, that's helpful. And then if I could just do one more on kind of the hiring environment that you guys have won a lot of new work here.
What are you seeing isn't getting any easier to hire people in.
Confident that you can get enough people to support all of this new work Yeah. It's really interesting, we're a people company and and literally.
Every day almost every hour, we're talking about people and hiring.
And quote the great resignation unquote means people are moving and if there are resigning from liners that are going to work someplace else, if they're resigning from someplace else or coming to work at light us and so are our accepts or in the 90% of the offers that we make we fill more.
<unk> of our positions between 30 and 45 days. So it's not a hiring problem. It's a retention problem and we all have I've got kids.
And coming out of Covid people are looking around they want to try something different and so we're doing a lot. If you were in our meetings.
We have a great talent acquisition team, they're doing a great job and we can always do better.
But we're spending a lot of our time on how do we continue to make us an attractive place not to come to work, but to stay and so this is career development. This is investing in the future of our employees. This is what we call upscaling teach them new languages, like Python and things like that so that they.
Can have a new job and stay at lighthouse.
If you will and Theres a lot of work and I know I was talking to some of our our competitors and they have the same problem and we're all focusing on employee development not so much from a hiring standpoint about where there's always a shortage of.
Cleared.
Computer science majors shoe with the access and the Intel World, that's always going to be a challenge but.
You should not you know listen about the great resignations or they can't hire the people we've been very very successful in attracting and hiring and now our emphasis is on retention.
That's helpful. Thanks Yep.
Thank you. The next question is from the line of Colin Canfield with Barclays. Please proceed with your questions.
Hey, good morning.
Well most of the growth narrative here are unchanged guidance suggests that you need to hit roughly 7% organic.
'twenty three 'twenty four so then as you look out over a multiyear period.
What are some of the pinpoints that you guys are looking at split between head count issues supply chain really kind of what does it take to not achieve those levels.
Well call. It I mean over a multiyear time horizon right things can go wrong and we've been talking about some of them here that Roger just feature retention right. So it's not a not a hiring issue per se it certainly, but making sure. We can retain people to have the head count we need to achieve that level of growth I mean first of all yeah, we put that.
Multiyear guidance out in October .
We knew when we put this year's guidance out we were on the lower end of the range. We're off to a good start we're not updating this year's guidance at this point in time, but we just talked about things like dez in catalysts for future momentum. So then it becomes can you execute can you get the people on the supply chain. So we're watching all those things very carefully you mean all indicators at this point in time are.
Nothing would take us.
Way from feeling like we can still achieve those longer term objectives. So that's the trajectory we're on but clearly something we focus on.
All the time as we go through and execute and deliver for our customers every day.
Colin there's still some big opportunities, where you have to when we've talked about the defense program, which has now been delayed to the fall and there are.
Series, a multibillion dollar programs that are still in our pipeline and so we have to continue to do what we're doing hire the people execute execute and the business development area. When the programs and then staff the programs and then the you know the customer has to fully fund mhm and right.
Right now I think your 'twenty, two and 'twenty three look pretty solid, but if there's a big sea change frankly, if we get into a war where the U S is actually involved that will re prioritize spending within the federal government maybe away from long term modernization to actual combine operations were.
Hopeful that won't happen, but that could have a significant effect on how we view the future.
Got it and then in terms of Capex for the year can you just discuss some of your biggest investment areas in the return metrics that youre contemplating within that portfolio.
Yeah. So when we put together a capex plan for the year all of our business have a variety of needs and there's a laundry list of items. Some of the bigger ones. You know we're in the airborne ISR business and that's an area. We've made some investments and generated excellent returns you know with IRR is.
Certainly mid to high teens, if not better. So we certainly look at the risk of an investment we will look at our weighted average cost of capital we try to generate.
It turns obviously that exceed that and we're still putting money into them as much as we're trying to overall strength and densify our facility footprint there are certain areas, especially in the Intel space New classified facilities, we're having to invest in and some areas on the manufacturing side that we're investing in some facilities will probably be our second biggest expense area and then it's just a.
Alrighty of smaller initiatives across the company.
Rob It looks like we have time for just one more question.
Yes that question is coming from the line of Mariana Perez Mora with Bank of America.
Good morning, gentlemen, good morning, good morning.
My question is a follow up to <unk> question.
From the standard market trends prices the company specifics.
Do you have enough problem courtyard.
How much of the first time I've gotten calls or how much of like that low single digit organic growth embedded in your guidance.
It's related to now that the program how much is related to no longer contracts and how much it's related to not break.
Well its recompete, so you're talking about Mariana, our organic growth profile and kind of dissecting that a little bit is what I think I heard from that question.
Inflationary pressures on cost Reimbursable programs, and just because there is capacity within contract budgets that we look for opportunities to continue to expand services to existing customers. So that's certainly an area that's contributing.
A couple of points of growth at a minimum we look for that and then obviously it comes down to the new start programs.
We've talked featured many of those engine will still be a growth story for us this year.
Military family life counseling continues to ramp up we talked about aegis. So some of those new Mega programs are probably the next thing I would point to to give us confidence on this year's growth trajectory and then Roger just talked about you know the pipeline is still rich and we're continuing to pursue multiple programs beyond that to fuel our growth. So I'm not sure if that exactly hit on your quest.
But happy to expand as necessary.
No. That's good color and then outfits, yes, so animal.
I'm clear on what's in the pipeline in terms of how we are today and what kind of a companys customers copy it.
Sure.
That's in our bolt on acquisitions.
Well Maryann I mean, we will give you too much in the way of specifics as far as what we're looking at in the M&A Arena, but I would tell you that a lot of properties continue to come to market and Roger talked last quarter about an followed up again this quarter. The mega properties. The larger ones are probably you know not something we have an immediate interested unless we really saw.
Compelling case to accelerate our strategy, we're certainly seeing some companies out of the space Arena come to market that's interesting to follow.
But we look at things that make sense to us, we vet things and but we're going to be thoughtful about where we engage in fact his prepared remarks, it really has to fit our strategy niche for us.
So yeah, Marianne I would just footstone.
We're really happy with our portfolio.
Portfolio today, and so we look at them.
M&A as a way to accelerate our technology or customer access or a relationship with a customer.
We were fortunate to be able to do some larger transactions early.
And it rounded out our portfolio and and now as we see technology advance there's always a couple of areas, where I think our time to market would be benefited by partnering with a with a company rather than trying to develop that internally and then there are.
Still customers in the federal space that we don't have a long term relationship with and so if we're able to accelerate.
That relationship through another company that has.
As a.
A great portfolio will do that otherwise as.
As we said in our capital allocation, we're really thinking about how do we get a value back to you our shareholders. So thanks for the question.
Okay.
Thank you at this time I'll turn the floor back over to Stuart Davis 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 light of US. We look forward to updating you again soon have a great day.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.