Q2 2022 Leidos Holdings Inc Earnings Call
Greetings and welcome to the light of second quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require offered assistance during the conference. Please press star zero from your telephone keypad.
Please note that today's conference is being recorded.
At this time I'll now turn the conference over to Stuart Davis Senior Vice President of Investor Relations. Mr. Davis, you may begin.
Thank you, Rob and good morning, everyone I'd.
I'd like to welcome you to our second quarter fiscal year 2022 two 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.
<unk> 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 will begin on slide four.
Thank you Stuart and thank you all for joining us this morning.
<unk> remains on track for another year of solid organic growth in core business profitability.
The affirmation of our defense enclave services contract award by the government Accountability office demonstrates our leadership in digital modernization across the federal government with strong demand for our technology solutions and services across our diversified business portfolio.
We continue to execute on our disciplined and balanced capital allocation strategy to drive shareholder value.
And we are proving our ability to compete successfully for talent with another quarter of robust hiring.
Now expand on these four points number one.
Our financial performance for the quarter was strong ahead of consensus at both the top and bottom lines revenues of 3.6 billion were up four 3% in total and up 4% organically year over year.
non-GAAP diluted EPS for the quarter was also up 5% to a dollar and 59 cents with an adjusted EBITDA margin of 10.2%.
We also generated $40 million of cash flow from operations and are on track to generate at least a $1 billion of operating cash flow this year.
Number two our business development results demonstrate our strong positioning in the government technology marketplace.
We achieved net bookings of $2 2 billion in the quarter, representing a book to Bill ratio of 0.6 over the past 12 months net bookings are $15 4 billion and book to Bill is 1.1.
Total backlog at the end of the quarter stood at $34 7 billion, which was up 4% year over year with funded backlog at seven 5 billion up 5%.
On a constant currency basis backlog was 268 million higher.
You can read about some of our awards in the press release, but let me highlight a few developments in the quarter.
Most importantly, the J O affirmed the 11.4 billion Dazzle Award delight us will support just as mission by consolidating enterprise I T services on a global scale and by providing standardized responsive and cost effective solutions.
This program should have a several year, one way of growing revenue and expanding profitability, but will not add materially to the 2022 revenue or earnings.
We also had an outstanding outcome on our social security administration position.
The S S. A recompete it all of the work under its primary I T services I D. I N Q known as <unk>.
T S S. She too in two task orders and we significantly expanded our role.
We were the sole large business awardee on both task force.
On the first will modernize and manage the assets as I T infrastructure, including data Center Daner operations networks Telecommunications cloud end user services and all of this is new work for us.
On the second well now perform all of the software development and mission application work that we previously split with other providers.
As expected both of the awards were protested last week, but should we prevail, we could double our revenue and SSA and make I T. S. S C to a top 10 program.
Finally, we've seen some initial indications of an improving airport screening landscape.
We were selected by the Dominican republics punch of kind of international Airport jobs.
Grade, both people and baggage screening and all security lanes within the terminal B checkpoint.
In addition, big volume and bid scale has increased meaningfully when comparing to the first half of 2021 and we're getting great feedback on our ability to differentiate our offerings by being bringing broader lighters capabilities like cyber protection.
Although we're not expecting a full recovery in the airport screening business until 'twenty 'twenty four.
It's good to see some positive trends here.
That said the overall bookings environment has been challenging as procurement timelines continue to extend.
D O D. Outlays for example are down 2% this government physical year to date compared to fiscal year 'twenty, one despite a higher budget.
Still our book to Bill ratio Understates, the true strength of the business development performance in the quarter as it includes nothing for jazz and the protest it essentially a awards our win rates and submit volumes remain high and we expect procurements will pick up.
To match the improved budget environment.
Number three our approach to capital allocation is a core part of our investment thesis, we've talked about being appropriately levered and maintaining our investment grade rating, returning our quarterly dividend reinvesting for growth, both organically and Inorganically and returning excess cash.
Shareholders in a tax efficient manner, and we're doing all of that.
In Q1, we executed a 500 million accelerated share repurchase and we've just entered into a definitive agreement to acquire Cobham Aviation services Australia's aviation Special mission business for about 215 million U S.
The transaction is subject to regulatory approval and other customary closing conditions and we expect to close by the end of the year, we expect the acquisition to be immediately accretive to non-GAAP EPS.
The business owns and operates 14 modified aircraft, providing border force airborne surveillance and maritime safety search and rescue to the Australian Federal government are a critical element of Australia's national security.
This acquisition Diversifies, our Australian portfolio into capability and mission services work with both the defense Maritime and Homeland Affairs programs.
Finally integration risk is manageable because airborne surveillance is what we know how did you well and we already have strong local leadership and infrastructure to support success.
Number four.
<unk> is an attractive destination for talented people in the second quarter, we have hired nearly 3600 people.
Number we've only surpassed once in five years and that's when we were simultaneously staffing the Navy engine program and the military family life counseling program.
Year to date, we've hired more than 6200 people.
Order after quarter, we've demonstrated the talent acquisition is a core latest strength.
On the Q1 call, we talked about challenges around retention.
Competition for talent remains high and it's critical skills for us such as software engineers and developers are in demand by both tech and non tech companies.
Even though voluntary attrition seems to have peaked we remain focused on keeping engaged with our people.
In fact, our June leadership Offsite was focused on retention and we're now implementing many of the ideas that came out of that session.
Before turning it over to Chris Let me touch on the federal budget landscape.
The house and Senate Armed services committees approved versions of the physical year twenty-three National Defense Authorization Act, both of which recommended healthy increases to the President's request.
Congress fully recognize the urgency of investing in our national security in the face of global security threats.
The physical year twenty-three appropriations process is also underway, which should result in significant nominal increases to 2022 levels, but we expect that the government will begin the physical year with a continuing resolution that should be resolved before the end of the 116.
Congress.
And finally I'm pleased to announce that we'll be hosting an investor site visit at Dania IDEXX in Huntsville, Alabama. This fall.
<unk> is an important part of our value proposition for investors and a key differentiator for us in the marketplace.
The event will start with a dinner with the leadership team on November 30th with a mix of briefings tours of the production facilities and Q&A with the team on December one.
Expect to come away with a much better understanding of the culture and key growth drivers for dynamics, including the hypersonic indirect fires protection capability and space based missile defense programs. Please reach out to steward, if you're interested in attending.
I'll now turn the call over to Chris.
Thanks, Roger and thanks to everyone for joining us today.
First quarter results were very positive overall and there are a number of moving pieces I want to cover this morning, starting with the income statement on slide five rare.
Revenues for the quarter were $3 6 billion up four 3% compared to the prior year quarter.
Revenues grew organically across all three reportable segments, given robust hiring in a recent program wins.
Adjusted EBITDA was 366 million for the second quarter, which was up one 9% year over year and adjusted EBITDA margin decreased from 10.4 to 10, 2% over the same period.
non-GAAP net income was $220 million for the second quarter, which was up immaterial year over year and non-GAAP diluted EPS for the quarter was $1.59 up 5% compared to the second quarter of fiscal year 2021, the performance of the base business is solid and stable.
A couple of factors below EBITDA that drive EPS are worth noting.
Net interest expense increased to $50 million from 46 million in the second quarter of fiscal 2021 with higher borrowing and the rise in interest rates the weighted average diluted share count for the quarter was $138 million compared to 143 million in the prior year quarter.
The current share count benefits from the retirement of 300000 shares as part of the final settlement of the ASR program.
Now for an overview of our segment results and key drivers on slide six.
Defense solutions revenues increased by two 4% compared to the prior year quarter.
The largest growth drivers, where the engine and if pick ramps, which more than offset the end of our Afghanistan support contracts and reduced material purchases supporting hypersonic programs.
In addition, the strengthening dollar represented at about a $24 million year over year headwind for our U K and Australia businesses, which lowered the segment growth rate by about a point.
Defense solutions non-GAAP operating margin for the quarter came in at eight 3%, which was unchanged compared to the prior year quarter.
Civil revenues increased seven 3% compared to the prior year quarter, primarily driven by the startup of the NASA Aegis program.
And increased demand on existing programs, including the support to Hanford and our engineering support to commercial energy providers.
Civil non-GAAP operating income margin was six 5% compared to nine 1% in the prior year quarter. As a result of an adverse arbitration ruling which led to $17 million of additional expense related to a dispute arising out of the acquisition of the I S and G S business from Lockheed Martin in 'twenty.
<unk>.
Excluding this arbitration right down silver.
Health revenues increased six 7% over the prior year quarter.
We continue to benefit from the ramp on the military and family life counseling program and dim sum had a nice year over year increase based on the deployment timing.
In addition, we had a $28 million equitable adjustment to cover costs incurred as a result of the COVID-19, pandemic, which caused non-GAAP operating margin to improve to 19, 8% from 17, 8% in the prior year quarter. We had originally anticipated to receive this payment in the second half of the year. So we're.
Pleased to resolve this matter earlier than expected.
Turning now to cash flow and the balance sheet on slide seven.
Operating cash flow for the quarter was $40 million and free cash flow, which is net of capital expenditures was $19 million, while dsos in the quarter came down two days sequentially to 61 $110 million of collections that we anticipated in Q2 came in during the first week in July .
We're targeting another three days of DSO improvement over the back half of the year, which is consistent with our historical pattern.
During the second quarter, we returned $51 million to shareholders, primarily through our ongoing dividend program. We also rolled over the $380 million term loan related to the Gibson Cox acquisition that came due in may.
At the end of the quarter, we had $339 million in cash and cash equivalents and $5 $2 billion in debt, including $150 million of commercial paper notes outstanding.
The purchase price for the Cobham Aviation Special Mission acquisition was 310 million, Australia, which we hedge to lock us in at the $215 million U S purchase price that Roger quoted.
With that acquisition, we expect 2022 will follow our standard capital allocation approach with a balance of organic and inorganic growth investments.
Dividends share repurchases against the backdrop of a leverage ratio trending towards three times.
Onto the forward outlook.
As shown on slide eight we're maintaining our guidance ranges for fiscal year 2022. The guidance does not include the impact of the Australia in aviation acquisition, which should be relatively small for this year.
Taking a big picture view, when we put together our plan for 2022, we had expected to build momentum through the year our guidance calls for the second half to be more in line with the first half from a revenue EPS and EBITDA perspective part of that shift is driven by over performance in the first half, but there are a number of other fab.
Actors that I'll address as I walk through the individual guidance elements.
On revenues, we're ahead of where we expected coming into the year stemming from the build out of our recent wins and on contract growth through trusted customer relationships. This gives us increased confidence in being in the upper half of the revenue range.
Increased legal expenses and the unexpected arbitration ruling are pressuring EPS and EBITDA margin and we're experiencing a larger than expected headwind from broader economic issues, including foreign exchange rates and interest expense. In addition, we've had more margin dilution than anticipated from the startup of some newer programs accordingly.
It'll be challenging to perform at or above the midpoint of the EPS and EBITDA margin ranges, even though most of the causal factors are transitory in nature, we're taking actions on items within our control we haven't changed our long term view of margins.
Finally, we're maintaining our operating cash flow guidance of at least $1 billion. The arbitration ruling will result in a $25 million cash payment, we will have to offset that payment, but I have confidence in our team's ability to deliver on the cash commitment.
We continue to monitor the potential for Congress to act on the new tax research cost capitalization rules at this time, we do not expect to make any federal tax payments related to the amortization of research costs. This year.
If the 2022 effective date.
Of the tax cuts and jobs Act research cost capitalization provision remains in place, we expect our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023.
With that I'll turn the call over to Rob So he can take some questions.
Thank you.
We are conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
If I start to if you 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 poll for questions.
Yeah.
Thank you. Our first question comes from the line of Peter Arment with Baird. Please proceed with your questions.
Yes, good morning, Roger Chris sure.
Hey, Roger I guess, you know you gave us some high level color.
Color on the on the budget and the backdrop I was wondering if just the way you look at it you know longer term, we're seeing the plus ups do you think just given the wins that you've had your ability that revenues could actually begin to accelerate as we think about you know longer term picture I know youre, not giving 'twenty three guidance, but I appreciate that color. Thanks, Yeah. You know, we're still really optimistic about the out years.
Yeah, we made the comment I think both Chris and I that long term, we don't see anything that changes.
The conversation that we've had in the past and frankly since we were all together in New York last fall the budget environment actually has gotten better.
And better in the areas, where we're focused and differentiated so I am I am still very bullish on the future.
And then just as a quick follow up on any any any anything to highlight in terms of the dynamics program of record outlook seems like that was continues to be something I think that's getting a lot of attention.
You know, it's it's it's really exciting across the board it was a hypersonic programs strong support.
We have actually three enduring fires program, one where the laser one where the missile and one with a high power microwave and those are all strongly supported the space business Theres things that hopefully will be able to talk about next quarter that are are really great developments, there and where.
Yeah, I don't want to overemphasize this but we're really really pleased with how that has worked out and of course, that's why we chose it.
For the visit in the fall and I can't wait to walk you through the plant and let you meet some of the team down there I think you'll be really excited too.
I appreciate the detail thanks, yeah.
The next question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Good morning, and thank you Hey, good morning Sheila.
Good morning, Roger I appreciate your comments on.
Pilot hiring and your retention focus when we look at your head count It was about 10% I believe year over year with organic growth of forest and maybe if you could square that disconnect where I felt a little bit.
Yeah, we've got a and emphasis to.
A little bit complicated I'll try to make it very simple direct labor is really important to us.
How are we absorb a lot of our costs and so if we can have higher direct labor under the same revenue bucket. That's a positive for us. So we're trying to increase the lighthouse content of the work we have across the board.
Now I'll also tell you a quarter to quarter month to month, its going to fluctuate, but we have a long term effort to increase our content and Sheila.
Sheila as you know significant part of our content is the work that our great people do every day and so.
You know seeing head count grow faster than revenue, we actually I view that as a positive that means we are implementing our strategy and we're having success in attracting and retaining the people that we need.
It does help us be successful.
Okay. Thank you.
And then I wanted to ask about how the business has been very good and maybe I'm too.
Okay.
What Bernd Hoppe currently IP hurdles in the Spanish how do you think about that.
Potentially incremental to your medical there's nothing on the second let Cerner EHR modernization program that is currently paused again.
What are your thoughts on the opportunity.
Yeah. Sheila this is Chris I'll get started maybe Roger can comment on the VA program obviously.
Obviously, we're very pleased with the health team and their ongoing performance and we had told you in Q1 that we had a one of a recompete successfully there was critically important although that you know there was an increased amount of competition introduced on that program. We also won some new work on international So both of those dynamics are shaking their way out and we'll continue to see.
International ramp up and we might see some pressure on the legacy side on the pre discharge work you've talked about burn pit that's something we're watching very carefully. The team believes there is a significant increase in demand that will come from that obviously, we had hoped and expected that legislation was passed by now we're monitoring that daily hours.
And we hope to have some good news soon so that's something that there is a modest amount of increased volume in the back half of the year associated with that coming through and you know we think hopefully will be in a position, where we can do better than that if things work through quickly and Roger My comment on the V. A.
And thanks Sheila.
So we watch the VA program very closely.
Have a a relatively small role in supporting Cerner on the program.
The movement of Cerner to Oracle, you know I think there's going to be a positive for the program Oracle has a real strong company a very strong software and data management you know, there's the Oracle cloud I think that will all be favorable for the V. A I know that they are paused, while they reassess that.
Our go forward.
Plan we.
We stand ready to support Oracle's Cerner the V a.
Any one of those organizations with a you know the best of Idose and frankly members of our Jim Some team and we'll just have to sit back and see how it how it develops again I know there are paused.
But the V a needs a single electric electronic healthcare record system and they need to interoperability with the active military and were strongly supportive of both of those.
Thank you very much.
Youre welcome.
Yeah.
Our next question is from the line of Robert Spingarn with Melius Research. Please proceed with your questions.
Hey, good morning, good morning, good morning Indra.
Roger one thing that we're noticing with.
Your numbers today, and also having some booze, but flat sequential sales in defense.
And I wanted to ask why we didn't see a sequential uptick from the March quarter to the June quarter, just given that the CR concluded in March.
What's going on is it just slow acquisition activity out of the Pentagon and why yeah. It is it is slow acquisition activity is slow ramp on the programs that we won of course some of the programs that we won got protest and so they've got pushed further into the year.
Outlays are actually down and I really can't I.
I can't tell you why what's going on in the acquisition in the Pentagon. Although we you know we do talk to the the the Pentagon officials have acquisition head of research they fully intend to spend the money you know they've got them the money authorized and appropriated.
I think they're a little bit like everyone. There's a lot of their talent retired.
They're still working remote you know show things are just taking longer and then something that's really important to US is what we call special project work on a lot of our contracts. This is where we have a base contract with a defined statement of work and the customer says gosh why youre doing that what could you do these other things that's really beneficial to us.
Both from a topline and our bottom line and that project work got delayed because of the budget uncertainty and we're optimistic that we'll see more of that in the second half of the year, but we're cautious to forecast. It is as you noticed and Chris's remarks. So yeah I think overall there is good news I.
Think short term, it's just kind of getting the machine running again and getting them to spend the money.
Well just on the back of that is there anything in particular about the types of awards that are being delayed or the size that are being delayed as it is it more common for larger awards and task orders to be delayed.
It was a good question and I am kind of thinking of what kind of Chris and I think that's typically what we would see the larger more complicated to evaluate multiple competitors longer and evaluation process.
I think the where we do best as on contract growth on existing vehicles, there's no competition and again, there's hope that we'll see more of that come through in this in the fall quarter, leading up the government fiscal year end, but the more complicated procurements and you've seen that you know what I mean different agencies are different but we've seen more consolidation into larger vehicles.
Is often the case and so those things can tend to push out the procurement cycle, yeah, and yeah, Okay, Rob I would comment.
And this is an absolute but if a program is over a 1 billion I think their customer runs the acquisition process with the knowledge that there'll be a protest. So I think in both peer review and.
Writing the acquisition opinion in the sourcing later I think theyre, taking more time to get it right.
To either avoid the protest, which obviously hasn't been happen or to ensure that the award will be upheld yeah. We've got protested again.
It happens to us almost every quarter now in our large social security win and I think in the government that they are now kind of like a protest is almost a normal and the bigger the program the more likely the protest.
Okay.
That's very helpful. I just wanted to ask you a clarification on the hiring you said you know attrition.
<unk> is coming down is that because fewer people are going into the tech.
Tech hiring slowing I guess, the best way to ask it yeah you know.
I mean, you know you and I are both speculating on why I think there's a concern about the economy. Some of big Tech has slowed their hiring some big tech because actually announce some layoffs.
It's the summer you know and just you know a lot of people are on vacation or not there was sort of a cycle and the seasonality to when people leave and when people stay you know very few people leave before like incentive awards are made in March.
And I hope, we're seeing a change in our long term trend.
But you know we've all been here before it could it could spike back we are still not back to pre COVID-19 levels. So although we have started to see some moderation in attrition, which I view as favorable.
But I do worry a little bit about the economy and you know.
I'm not.
I'm not forecasting a recession, but I am forest casting maybe a little tuning down and growth so and I think for a lot of people.
We have great jobs, we have great work.
We pay really great salaries, we have really cool stuff to do and we're able to attract some really great people and I think once they get here and they start doing some of the fantastic stuff that we do they go gosh I wanted to do that.
And that has that message has gotten through to our employees and I think we benefited from that.
Very helpful. Thank you.
Our next question is from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions.
Hey, good morning, good morning.
In Guyana.
Roger I think you said you didn't book anything for Dez, but just any update on your expectations for what that ramp could look like or how much that could contribute in the future and whether or not that could ultimately be a top 10 program, yeah, and you know and as we've been turned on for the first task order, which is very small where.
Uh huh.
It's been at least 15 to 20 seconds or describe the program.
And as we work with dish to create a common architecture called D. O D. One yet and once we've established that architecture, then we will migrate.
20, some odd federal agencies to the new architecture. So the first thing we have to do is partner with our customer and define the architecture and that is a really hard work, but a small number of people working in partnership with a different customer and that's going to go on for months. So it's going to be really low.
I don't think we put numbers out, but as I think I've said not significant impact to topline or bottom line next year right. We started to do migrations and then in the third year, we do even more migration so and.
And again I think we said this last quarter is it when we recorded it was going to be a very slow ramp, but then it will ramp into a significant program you know whether it will ever achieve the idea IQ value of $11 5 billion, you know I guess well have to tune in 10 years from now it has the potential to do that.
Because we believe the architecture and the cost savings and the increased cyber security and the efficiency of this new D. O D. One net will be so advantageous to the government customers that people will want to migrate maybe even more agencies overtime, but it's going to take a while to get there.
Okay. That's helpful. And then maybe just in terms of margins. It looks like it was 9.9 in the quarter. Excluding the charges. Maybe if you could just give us kind of an around the horn by segments, what that looks like through the rest of the year with.
Health down from these elevated levels, maybe defense and civil what those trajectories look like yeah. Gavin you know well, we don't put too fine of a point on margins by segment, but I think you've got it right. We've been signaling health is an area that we would expect to moderate down we still expect that to be the case.
But again, we love the team performance, we talked earlier about burn pit legislation, there's some dynamics there that could help us but it will not run at these levels because theres been a couple of one timers in Q1, and Q2 and health.
[noise] Civil I think again aegis was a program brand new start we knew it was going to be certainly at the front end of this program multi year program on the lower margin range and that will continue to ramp up but civil is also where we absorbed a lot of the legal charges that I talked about so we see those margins trending better Oh.
We you know Roger spoke about some areas of improved.
Improved.
Activity in our security products business I don't Wanna get ahead of ourselves, but that's an area that I'd say the back half will be stronger than the first half on profitability margins in civil is a well run business overall, so I think the civil performance should trend a little bit higher and then defense quite honestly is probably.
Over time, it will be higher whether that occurs in the back half of this year is TBD I mean, the special project work that Roger talked about is something that we'd love to see that come on at a higher volume are not yet seeing that in and therefore don't anticipate that will change in the in the very near term.
There is some transition you know the Afghan work moderated down there are some great airborne opportunities that the team is pursuing that's something we hope to speak about in the future that there will be a growth catalyst in margin catalyst for us, but right now I'd say probably along these this current trajectory on the defense margin side for the near term.
Okay. Thank you.
Thanks, Kevin.
The next question is from the line of Colin Canfield with Barclays. Please proceed with your questions.
Hey, good morning.
And together, perhaps Peter in Rob's question could you just discuss some of the bigger drivers of next year's growth acceleration it sounds like the defense hardware pieces that dynamics.
You seem to be adding outsize less obviously.
And it takes time to get all of that.
Added in.
Our commercial Aero.
Arguably returns in 2020 for I guess, it's still a TBD given that kind of exposure that you guys have to widebody traffic. So maybe if you could tie together kind of what are your biggest uplift there is into next year.
Yeah, I mean call were early to to get.
In detail about twenty-three right and will certainly speak about that more as we get to next year's guidance.
But again I think Roger talked about the budget backdrop as a foundational starting point and that's favorable therefore, the volume of things that we're seeing in bidding on continues to be strong and favorable.
And so you know defense activity is one that you know we've seen a lot of throughput and opportunities mortgage market opportunities more C for ISR opportunities I mentioned, hopefully some airborne opportunities, where we demonstrated a great capability that the customers interested in seeing more of a dynamic in that.
Defense hardware side, absolutely. There are some programs that will be ramping up theres also some programs that will be moderating as we transition towards proof of concept completing demos and getting into hopefully a production cycle award, which will probably be more likely 'twenty for.
And so you know those things are all should do fine civil again would probably be the aviation hardware accelerating growth, but not back to pre COVID-19 levels, but the trends are positive there and more civil agency digital modernization opportunities, we continue to see and bid on that were pursuing and the wildcard is health.
Well, we the one big catalysts that we've been waiting on is the reserve health readiness program, we spoke about that for over a year now that had been delayed. It was originally in this year's expectation. It's now fully out of any contribution for 2022, but we see that as a big program that we've already won and should ramp up nicely.
In 2023, so those are a few things that come to mind, but again, we will talk in more detail about 'twenty three as we get.
To that time of the year.
Got it.
Longer term strategic question, but can you just talk about how you're preparing the business for a structurally impaired down environment. Both you and Bruce are kind of talking about cyclical benefits in a softer economy bring up head count, but if you look at the population statistics.
Labor Force political for Labor force participation isn't coming back in the U S population growth is almost close to shrinking. So if you think about how you guys are structuring the business around kind of that environment.
Yeah, Hey, Collin I'll I'll touch on it a little bit.
I'm not sure we have enough time on the call as I talk about all the things we're doing but.
I think we all realize that we are in an era, where theyre going to be more jobs and people I mean, it's just a fundamental structural problem.
Look at college, Grads, and where we can source and and so that from a long term standpoint talking with our HR in our leadership team it's about okay.
What can we automate how can we put <unk> into our administrative and functional organizations and free the talent up so that they can provide value added goods and services to our customers.
And then what is our new knowledge worker work look like in this industry and then how do we hire them retain them upskill them right and grow them over time, and so we have a long long term view of our labor strategy and how we want to take.
People and create multiple gauge in multiple steps in their career. So they graduated from college they come here.
They pick up some stretch stackable credentials they add another computer language.
They pick up Python and they get a master's degree we continue to invest in them. They continue to grow and move professionally and they they go Wow I'm doing great work I'm, making competitive.
Salary.
And I see.
My career advancing at the company opportunities for growth and management, you were growing and that's a terrific place to be where we're growing and hiring hiring people, but we do realize that the world that I grew up in is no longer here and we have to be very thoughtful about.
<unk>.
Where we want to put our people and frankly, maybe what we want to do with partners and then what we wanted to do with automation.
And the only thing I'd add to that is you know again, we've been talking about some of these businesses, but clearly we see as growth catalysts. Some of our businesses that are less head count dependent and what's happening in dianetics, what's happening with the security products business. So again, they're not a huge part of the portfolio, but there'll be coming increasingly larger part of the portfolio over time.
Got it thanks for the color. Thank you good question.
Our next question comes from the line of Cai von <unk> with Cowen. Please proceed with your question.
Yes. Thank you so.
You and booze had some trends that were very similar strong sales.
I'm very anemic bookings, although very strong fundings, which I don't understand how you would get those two together and very weak cash when it slips into the next quarter, maybe give us some color on how we could get the see the incongruity of bookings and funding and then looking forward you know we've got them.
All of that.
Funding is there how are we going to have the super blowout September quarter in bookings that we could or is that still going to be slowed by.
The issues you discussed Roger Yeah. So Cai I think ship the next quarter will be better, but I I don't see the super blow out.
Yeah, Yeah and and.
Clearly a boos and all the other competitors will work in the same industry. We're all facing the same.
Acquisition issues.
Point I would make which is you know.
Something I can speak to from light us I don't know about the other companies is our win rates are about the same right. We didn't lose a lot of programs in the first quarter or second quarter. It wasn't a lot of opportunities that were canceled right things just moved to the right and we saw that across.
Our entire value stream again as you pointed out some of our cash payments that we thought were going to happen in the quarter.
Got paid in the first week or two of July Chris talked about that being I think over $100 million and it's it's just the process and the customer is slow.
And we and I'll go back in.
And then we've got a couple of protests, which really hurt our book to Bill are we kind of plan. Those every once in a while we get surprised we don't get a protest, but more likely than not we get a protest and that the social security bid probably wont turn around you know provided we prevail in our protest not until third quarter, but in but in fourth quarter.
So that's not really going to give us much lift in third quarter again should be stronger, but I think it is a slower ramp from the budget problems that we had earlier this year at the end of last year and I think Kai as you know increasingly we're talking about the the Mega Awards. The larger awards those just don't.
Often lineup with the government fiscal year and third quarter cycle. So you can see the bigger quarters and any time like we had a great great first quarter on the funding side I mean again I think that's conversion of a previous prior awards unfunded to funded that's not always going to follow the same cycle, it's easy for a contract officer to make.
That action on something they've already awarded and give you incremental funding dollars versus a whole new procurement decision process. So.
You know to me, it's Craig we like to see our funded backlog improving but I don't think you can read too much into the.
The cycle around Windows activities take place versus brand New award decisions I think a good example is this program, we called Fens, which is sort of a network infrastructure program for the FAA.
No.
A year ago, we thought it would have happened in first quarter and first quarter. It got delayed to the second half of the year now, it's a little bit uncertain, even when theyre going to make the award.
I think we can almost count on a protest so when they make the award in the third quarter or fourth quarter that could be extended well into 'twenty three and we just have that kind of uncertainty and we've seen more of that trend in more of that behavior, perhaps than we have over the past couple of years.
Thank you and can you give us just some quick color.
What are you seeing in terms of July has there been any pick up or is it still at the same level.
What what are you seeing there.
Ah well cash was good in July .
From a war we have a couple of strategic wins will be able to talk about the happened and yes. We did there theyre not quite well, we're not an ounce of all yeah yeah.
Well I always think every month, we have great wins. So I mean, that's just sort of me, there's sometimes the wins I'm most excited about probably.
Don't make the print because there are strategic and there is technology involved and we had some of those are in July that will be able to talk about in the next quarter.
And but there was no mega win in July in probably our next biggest win on the horizon.
There's a couple of programs there is a big idea IQ that might get award, but then we have to fight for task orders is probably that FAA are.
Finch program.
Thank you very much yeah. Thank you.
Yeah.
Okay.
Our next question comes from the line of Matt Akers with Wells Fargo. Please proceed with your questions.
Hey, good morning, guys. Thanks for the question I.
I Wonder if you could.
Could you comment on your international business until you did the acquisition in Australia, Obviously, you know a lot of our allies and we're talking about spending more on that just curious if that could be a bigger part of the business in the future.
Let's see where we're really pleased with our international work and we're a little under 10% by revenue of dollars they'd come from outside the U S right and but we're gonna be very selective and we tend to follow the U S and five eyes were strong in the U K and.
Australia has always been a traditionally strong market for us.
And by the way, they're a terrific ally of the United States. They have for it I think in every war alongside the U S.
Since the turn of the century, so growing more in Australia is definitely a priority for us, but we want to grow in the right way and think of US as you know kind of growing country by country, we want to.
B in our country grow large enough, where we can have infrastructure and critical mass and then use that country to maybe move regionally.
We are not going to be you know like some of our competitors, where we're big enough that we can have offices in and in every country.
But we think the international there was a nice mix in the portfolio. It can be counter sickle cyclical with some of the priorities within the U S. And then I put it into a whole different category, our SCS business, our security business, which by its nature is global I mean, it's just the way that.
Business works, both at airports and ports and borders the machines are easily transportable by way of the inspection requirements are relatively uniform.
If you can.
Put a provision at Dulles you can put a provision in Hong Kong, usually with a small mas and that equipment for US is manufactured in the U S. And then we export it around the world and around the world looks to U S is the standard setter. So.
And of the SCS business, you know, we're probably anomaly of 125 countries, but that doesn't mean that we have necessarily a large organization in those countries. We might have a field service tech in an airport or we might have a couple of people are doing maintenance and support and that business I would tell you today is already globe.
And isn't going to become more global whereabouts.
In every country that we feel is appropriate for us to sell and I really understood. Your question to be more of okay. Well you bought another business in Australia, which we think is a real positive we're really excited about the business. It's.
It's a critical mission for the Australia, and government and growing larger in Australia is absolutely part of our strategy.
That's great. Thanks, and then I guess, just one more on a kind of a dead end.
The long term targets that you guys you guys gave at the Investor Day last fall you know how much was was that is included in that not only from kind of a I guess a growth standpoint, but also.
Margins in it.
Any potential dilution from that contract, we should think about it that that program ramps up over the coming years, well, Matt I would tell you that certainly in the near term that won't we don't expect the margins on that program to get at or above the corporate average. So we we recognize there are some initial investment in fact, that's part of what we're seeing this year quite honestly is what we are.
In the protest process. The team was building out the PMO staff. There. We're getting ahead of transition working jumpstart, so where we're spending money on <unk> and we'll continue to do so because we're taking a big picture long term view on that I would just tell you that I expect 24 to be more of a significant contribution then.
<unk> 23, so we've got this ramp up that Roger spoke about.
You know it's early so we can't give you a lot of precision on exactly the timing and customer adoption.
But certainly by 'twenty, four and it'll it should be a more significant part of the growth story for us.
Great. Thank you. Thank you.
The next question is from the line of her children with Stifel. Please proceed with your questions.
Hey, good morning, and thank you for the time, Hey, good morning Bert.
Roger you noted that SG&A will not recover until 'twenty. Four you had previously guided that business I guess, if we go back to early 2020 to low teens annual sales growth with expanding margins back when you did that deal with L. Three how should we think about the path forward for SG&A now does it does it get back.
Onto that tracked or are you really just sort of thinking about it in terms of pro forma 2019 sales.
You know the way we look at it.
As we.
We had a path when we bought the business you know when we signed the deal before Covid and then there's this huge trough in our revenue and it was affected margin too, although it's still a nice margin business right.
And we hit bottom and now we've seen it start to recover and we are seeing double digit growth in that business year over year, and our forecast and it will continue we're in 24 will hit the pre COVID-19 level and then it will continue to grow beyond that.
As airports both in the U S and then the rest of the world and modernizing their equipment.
One because of age, but secondly, because of evolving threat, which is new chemicals Fenton all other chemicals math that the the old machines couldn't detect what we call a touchless is the big demand at airports as we all know is.
To be able to just walk through and the technology is emerging where most airports 10 years from now we'll have a touchless experience for the passenger and we expect that to drive significant demand I know I would go down a lane that was touchless versus one that was not well I think plus out of it.
Improved throughput right, which is a huge deal and efficiencies so and we have been during this sort of trough to area investing heavily in technology. So that we are ready to compete as the business comes back.
Just a clarification question on that.
Border security fit in I know you have some products there that seems like theres going to be a lot of future demand does this acquisition in Australia.
Any relation to what you might be doing in that business or are they completely separate yeah. There they're completely separate so this is.
More the Australia business, our airplanes with sensors flying over.
Pretty much blue water and latoya water looking for boats that are in distress and maybe boats that shouldn't be there and our other business is literally where you drive a car through you drive a truck through we have a rail business where at the Mexican border, where the the railcars go through one of our machine and that we do.
Personnel screening so they're very very different.
It is.
You know I think you are right the customer when you go wages at the top is the same.
In Australia, but it's probably a different organization of of of that customer and we we were not interested in the cobham business because of a crossover to our NCS business.
Got it.
And then just a quick follow up if I may I'm. The appropriations process is likely to yield I think you mentioned earlier Roger defense budget, that's higher than initial request.
But that's likely to put pressure on nondefense just in terms of thinking about total spending is that a good outcome in your view I know you have pretty similar exposure to both.
Yes.
First of all let me tell you what I think is going to happen and then if you want an editorial of what do I think.
<unk> user to hear that too.
Nondefense will move with defense I don't think you get a omnibus without moving the nondefense budget in the same direction I think that's what we've seen in the past couple of years I think that's what will happen this year and whether we do this in a lame duck, which is what I think is going to happen and people are going to want to move nondefense in defense.
It's sort of in lock step, we will get an omnibus it will get done before the next Congress comes in and and we will move on and I think that will be good for our lighthouse across the board both our defense business, our Intel business, our health and civil.
You asked me if that's good but I think it's good for the company I think it's good for our employees and our shareholders I have 30 year old Kids and you know there are times, where I wonder when a when we're gonna have to pay this back and.
And that means maybe there was a tax increase sometime in the distant future or another source of revenue for the federal government, but from a LIFO standpoint from an investor standpoint, I expect the budget environment to be very very healthy for us for years.
Thanks, Roger and thanks for that.
Right.
Yeah.
Our next question is from the line of Seth <unk> with Jpmorgan. Please proceed with your questions.
Okay, Thanks, very much and hi, Tobey.
Good morning, Okay at that.
Just a quick.
Quick one from me. This morning, it became a chart, but there are at least mentioned.
The reduction in materials and tank.
Dynamics.
Driver for defense and does that have to do with startup scheduled.
Changes in activity, there or is that more of a <unk>.
Supply chain issue kind of as we've seen across the industry.
Including at some companies in similar areas like like Raytheon and arrogant.
Yeah, So Seth.
Obviously supply chain is a factor that we're seeing here and there, but the particular issue of hypersonic was kind of a plan the cycle production schedule for that program. It's following you know of course that we expected it to now we're hopeful for some more authorization from a funding perspective that could.
Help the program.
The growth catalyst in 2023, that's something we're paying attention to but right now theres not a big issue from a supply chain bottleneck, although I would say that we're still not out of the woods on that as it relates to certain component parts in various parts of the business, but it hasn't been a major factor for us this quarter.
Great. Okay. Thank you I'll stick to one today I appreciate it.
Thank you. Our final question is coming from the line of Tobey Sommer with Jewish Securities. Please proceed with your question.
Hey, good morning. This is actually Jasper bibb on for Tobey. Thanks for taking my question. So I just wanted to ask about margins in the <unk>.
Civil segment, I think you highlighted SG&A in the contract ramps there, but could you provide a bit more color on when you expect that segment to return to more normalized 2018 to 2019 profitability well yeah.
That's certainly something we.
Have ongoing discussion with the leadership team and you know Theres a lot of catalyst within the civil business certainly SCS is a big part of the longer term margin strategy I I've mentioned some of the nice program wins that we've had on the defense on the digital modernization side and those will be on the lower margin side of the near term.
Where we do really well on margins in our commercial energy business has been a strong margin are catalysts for civil we're continuing to see that grow although it's a smaller part of the portfolio, we do well in our transportation and aviation business with the FAA quite honestly, that's subject to F N b.
<unk> environment New program starts.
You know the anchor is some of our <unk> support contracts mission ops, whether that's with D O or other customers are tend to be on the lower margin side. So I would say in the near term to get back to those levels is probably a multiyear undertaking as we look to.
Win and execute more dense modern portfolio and C. S E S rebound, but some small improvements in other parts of the portfolio of what we after with the team. So that's how we see it right now Jasper and the near term.
Okay, Yes.
The detail there thanks for taking the questions got it okay, great. Thank you.
Thank you on that.
A question and answer session and I'll now turn the floor back to start Davis for closing remarks. Thank.
Thank you Rob and thank you for your assistance on todays call and thank you all for joining US 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.
And have a wonderful day.
Okay.
Okay.