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Edited Transcript of LDOS.N earnings conference call or presentation 23-Feb-21 1:00pm GMT

·43 min read

Q4 2020 Leidos Holdings Inc Earnings Call MCLEAN Feb 23, 2021 (Thomson StreetEvents) -- Edited Transcript of Leidos Holdings Inc earnings conference call or presentation Tuesday, February 23, 2021 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * James C. Reagan Leidos Holdings, Inc. - Executive VP & CFO * Peter Berl Leidos Holdings, Inc. - Head of IR * Roger A. Krone Leidos Holdings, Inc. - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Cai von Rumohr Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * David Egon Strauss Barclays Bank PLC, Research Division - Research Analyst * Gavin Eric Parsons Goldman Sachs Group, Inc., Research Division - Associate * Gregory Arnold Konrad Jefferies LLC, Research Division - Equity Analyst * Joseph William DeNardi Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst * Peter J. Arment Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Seth Michael Seifman JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to Leidos Fourth Quarter 2020 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. At this time, I'll turn the conference over to Peter Berl, Senior Vice President of Investor Relations. Mr. Berl, you may begin. -------------------------------------------------------------------------------- Peter Berl, Leidos Holdings, Inc. - Head of IR [2] -------------------------------------------------------------------------------- Thank you, Rob, and good morning, everyone. I'd like to welcome you to our fourth quarter 2020 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team. Today, we will discuss our results for the quarter ending January 1, 2021. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. After these remarks from Roger and Jim, we'll open the call for your questions. 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, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is included in the press release that we issued this morning and is also available in the presentation slides. The press release and presentation as well as a supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com. With that, I'll turn the call over to Roger Krone. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Peter, and thank you all for joining us this morning for our fourth quarter and full year 2020 earnings conference call. Before we close the door on last year, I'd like to take a moment to thank the approximately 39,000 Leidos employees, our business partners and our customers for their unwavering commitment and collaboration in light of the COVID challenges. I'm inspired by what we accomplished in the past year together and the challenges that we will solve in this new year for the betterment of our communities and our customers' mission. Fourth quarter results reflect the resilience of our growing portfolio with new record levels of revenue and backlog, coupled with margin expansion and further balance sheet optimization. This performance positions us for above-market growth in 2021, fueled by our talented, diverse workforce who continue to engineer and deliver technologically innovative and secure solutions for our customers' evolving needs. Revenues for the quarter were $3.25 billion, up 10.1% from the prior year, reflecting 2 strategic acquisitions that closed in 2020. Q4's adjusted EBITDA of 11.3%, up 30 basis points compared to the prior year period, reflects strong program performance and indirect cost management that delivered 8% growth on non-GAAP EPS totaling $1.63 for the quarter. Net bookings of $3.3 billion in the quarter resulted in a book-to-bill slightly above 1 and 1.4x on a trailing 12-month basis. These solid results do not reflect any material contributions from the Navy NextGen program which was resolved in Leidos' favor late in the year, the $1.7 billion FAA NISC IV recompete award that is currently under protest, or the $1 billion Military and Family Life Counseling award that was announced in January. These 3 wins, coupled with a backlog that is more than 2.5x our historical annual revenue and a healthy new business pipeline, provide us with high confidence in our growth outlook in the new year and beyond. For the full year, we generated record revenue of $12.3 billion, an increase -- an annual increase of 10.8%. Full year revenue delivered 10.8% adjusted EBITDA margins that yielded non-GAAP earnings per share of $5.83. This represents 13% growth over the prior year. Additionally, the business generated over $1.3 billion of cash from operations for the year, far exceeding our initial 2020 guidance. Full year net bookings of $17.8 billion contributed to a record year-end backlog position of $31.9 billion, a year-over-year increase of over 32% or a healthy 23% after adjusting for acquired backlog. Turning now to several significant contract actions in the quarter that position the business for significant organic growth. In the Defense Solutions segment, the U.S. Court of Federal Claims ruled in favor of our Navy customer's award of the NGEN program where Leidos will unify, operate and maintain the shore-based networks and data management for the Department of Navy's Program Executive Office Digital to improve capability and service under one enterprise network construct. The single-award IDIQ has a 5-year base period of performance, followed by 3 1-year option periods with an approximate value of $7.7 billion if all options are exercised. Due to timing of the court's decision, no significant task orders were booked in the fourth quarter. Also in the Defense Solutions segment, the GAO denied a protest, clearing the path of the U.S. SOCOM tactical airborne multicenter sensor platform support task order, also known as STAMP II to Leidos. Under the contract, Leidos will provide pilot services, airborne sensor operations, hub-and-spoke operations and excursion support as well as under -- other engineering support services in support of the programs De Havilland Dash 8 and King Air 300 aircraft. The award has a total value of $649 million and includes a 1-year base period of performance, followed by 4 1-year option periods. Additionally, within the Intelligence Community, the company was awarded contracts collectively valued at $304 million, if all options are exercised. Though the specific nature of these contracts are classified, they encompass mission-critical services that help to counter global threats and strengthen national security. This morning, we announced the second of 2 strategic acquisitions that occurred over the last several months. Similar to transactions we closed in 2020, these recent deals support our strategic framework of adding capabilities and deepening customer relationships. We expect Gibbs & Cox and 1901 Group to be immediately accretive to non-GAAP EPS. The acquisition of Gibbs & Cox will extend our existing maritime business and add specific capabilities and services, such as naval architecture and marine engineering, 3D modeling and design and specialty engineering to the solutions set that we offer to our customers. Gibbs & Cox has a rich history dating back to 1929, and their workforce is highly regarded in the industry and across the globe. In addition to being positioned on the front end of next-generation vessels, the business combination provides significant tailwinds for participation in the maritime unmanned market and accelerates Gibbs & Cox' expansion in the undersea domain. We anticipate that the transaction will close in the second quarter after the completion of regulatory reviews. Second, in early December, we announced the strategic acquisition of 1901 Group, a leading cloud and digital modernization as-a-service provider. The transaction is now closed. And this quarter, we welcome the nearly 400 IT cloud and cyber specialists to the Leidos family. In addition to its deep bench of technical talent, the company has developed a robust as-a-service delivery model that is scalable, repeatable and affordable. As our customers continue to seek on- and off-premise managed service solutions, 1901 Group will expand our team's ability to address this accelerating market. Organizationally, 1901 Group is aligned with our defense group, and through collaboration with our CIO and CTO leadership, we are in the process of leveraging these new capabilities across the enterprise to the benefit of our customers. Looking to the macro environment. With the current year $740 billion NDAA passed into law, attention now turns to the President's pending fiscal year 2022 budget recommendation, which is unlikely to put pressure on defense industry outlays before fiscal year 2023. Given the great power competition and leading national security issues, we do not anticipate major cuts, but rather flattish to slightly declining budget numbers with focus on modernization and reprioritization. Also, with projected increased focus on health care demands and civil infrastructure, particularly transportation, we believe that our diverse portfolio of differentiated solutions is well aligned with the administration's and our customers' highest priorities. Next, I want to take a moment to highlight Leidos continued commitment to mental health and well-being of both our employees and our communities, a topic that has been increasingly more front and center for families over the past 12 months. Approximately 3.5 years ago, we launched an initiative to do our part to tackle the opioid epidemic and challenged other companies to do the same. These efforts organically grew to also address the underlying contributors to substance misuse associated with mental health and well-being, including anxiety, depression and suicidal tendencies, all exacerbated by the COVID-19 pandemic. Last year, we added internal benefits and resources, for example, the offering of the Headspace app to our employees free of charge. We also elevated the conversation in our communities through continued engagements with the Community Anti-Drug Coalition of America, with the DEA in support of their national take-back days and by working with the American Foundation for Suicide Prevention. In the most recent quarter, we formed a strong relationship with the Milken Institute Center for Public Health, including participating in multiple virtual global panels focused on addressing both mental health and substance misuse. Additionally, Leidos participated in Out of Darkness suicide prevention virtual experiences in Washington, D.C. and North Alabama. At both events, we raised awareness as well as critical funds needed to address the stigma surrounding suicide. We look forward to continuing to lead and support these critical health initiatives for our nation's citizens in this new year. Finally, I would like to mention that Leidos, for the fourth consecutive year, has been recognized as one of the 2021 World's Most Ethical Companies by Ethisphere Institute, a global leader in defining and advancing the standards of ethical business practices. This recognition is a testament to our employees worldwide who embody this core value. With that, I will turn the call over to Jim Reagan, our Chief Financial Officer, for more detail on our results and our 2021 outlook. -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Roger, and thanks to everyone for joining us today. I'll start by providing an overview of our 2020 results for both the fourth quarter and full year followed by a review of 2021 guidance. First, starting with revenue. Fourth quarter revenue grew 10.1% over the prior year period driven by the acquisitions of Dynetics and the security detection and automation businesses, partially offset by 2019's 53-week year, which included a couple of additional business days in its final month. On an organic basis, we experienced contraction of approximately 3% due to the continuation of some COVID-19 impacts as well as the timing of customer procurements and delayed new starts, which more than offset new program wins and on-contract growth in parts of the portfolio. Our organic growth calculation excluded the performance of acquired businesses until a full year has passed. More details can be found on Slide 16 of the earnings presentation, which is available on our Investor Relations website. Full year revenue of $12.3 billion was at the lower end of our guidance range due to: one, better-than-expected indirect cost savings that translated into lower revenue on cost-reimbursable programs; two, the favorable decision on the Navy NextGen award, which occurred later in the quarter than previously estimated; and three, timing on new contract awards and on-contract growth decisions attributable to the ongoing effects of COVID. We expect a number of these events to become tailwinds for 2021. Fourth quarter adjusted EBITDA margins were 11.3%, 30 basis points higher than the prior year period. Our robust margin this quarter were driven by higher margins on new programs and favorable write-ups on existing programs due to strong program performance and reduced indirect rates. We delivered full year adjusted EBITDA margins of 10.8%, matching the top end of guidance. This represents our fourth consecutive year exceeding our 10% or higher long-term target. After adjusting for the $81 million net gain from the VirnetX legal matter and our estimated COVID-19 impacts, adjusted EBITDA margins would have been 10.4%, which is comparable to our 2019 performance. Fourth quarter non-GAAP diluted EPS of $1.63 grew $0.12 over the prior year period. Contributions from strong program performance and increased volume on existing and new programs were the primary drivers of the 8% growth year-over-year. We exited the year with non-GAAP diluted EPS of $5.83, a 13% increase over 2019 and at the upper end of our guidance range. Cash used in operating activities was $52 million. As projected in the third quarter earnings call, the net cash outflows were driven by the full repayment of the accounts receivable monetization facility, resulting in 0 utilization of the facility at year-end. It is also worth noting that we completed $67 million of share repurchases in the fourth quarter, delivering on our commitment to return value to our shareholders. Our remaining share repurchase authorization under the program is approximately 7 million shares. Full year operating cash flows of $1.3 billion benefited primarily from 2 nonrecurring items: the $81 million net receipt from the VirnetX legal matter and $123 million of CARES Act-deferred payroll taxes. These items, coupled with strong balance sheet management, higher labor utilization and the accelerated collection of receivables previously planned for 2021 drove a 34% increase over 2019, exceeding our previous guidance for operating cash flows. And you may recall that the original 2020 guide for operating cash flow was $1 billion. And to recap, the stronger cash from 2021 resulted from: first, that $123 million of CARES Act payroll tax deferral; two, net advance payments of $74 million; four -- excuse me, three, higher staff utilization of about $70 million; and three -- four, the VirnetX cash flow issue of $81 million that was a tailwind for cash flow in the year. Bookings of $3.3 billion for the quarter resulted in a 1.0x book-to-bill, with record ending backlog of $31.9 billion. For the year, we booked over $17.7 billion of net awards, reflecting a 23% increase over 2019 and driving a 1.4x book-to-bill for the year. And now for an overview of our segment results. Defense Solutions revenue increased 16.5% over the prior year quarter and contracted 1.6% organically. Driving the strong growth was the Dynetics acquisition and the ramping of new programs. This growth was partially offset by delays to new awards, such as the Navy NGEN and STAMP II contracts, material timing and reduced volume on legacy contracts. And for the full year, Defense Solutions grew 16.5% over 2019, including 1.7% organically. Non-GAAP operating margins in the Defense Solutions segment of 8.9% contracted 90 basis points from the prior year quarter. The primary drivers of this change were a reduction in program volumes and the successful settlement of an outstanding legal matter in the fourth quarter of 2019, which drove higher margins 1 year ago. Defense Solutions booked over $2.3 billion in net awards, resulting in a book-to-bill of 1.2x for the quarter. For the full year, Defense Solutions booked nearly $9 billion in net awards, a 5% increase over the prior year and driving a 1.2x book-to-bill for the full year. With regard to our Defense Solutions segment M&A, we are very pleased with Dynetics' contribution to the segment. The business delivered on the annualized revenue commitment, and we are particularly pleased with Dynetics' pro forma full year growth rate of 50% as well as the business' positioning in the new year. In our Civil segment, revenue grew 5% over the prior year quarter and contracted 6.6% organically. The top line growth was driven by the acquisition of the security detection and automation businesses and new program wins. This increase was offset by reduced volumes on existing contracts and COVID 9 -- COVID-19 impacts to programs with our FAA and National Science Foundation customers. Civil non-GAAP operating margins of 12.3% increased 30 basis points over the prior year quarter. The primary drivers of the strong margins this quarter were product timing and mix, favorable net write-ups due to increased cost efficiencies on certain programs and reduced indirect rates. The Civil segment delivered full year non-GAAP operating margins of 11.7%, an 80-basis-point increase over the prior year. Civil recorded over $700 million in net bookings for the quarter, resulting at a 0.9x book-to-bill and a 2.2x book-to-bill for the full year. Turning to the segment's M&A. The SD&A Business was impacted by a longer than previously expected decline in air travel, resulting in lower revenue for the year. Despite the extended effects of the global pandemic, we are pleased with our technology and competitive positioning as the market begins its path to recovery during the latter half of 2021. And finally, turning to our Health segment. Health segment revenues contracted 2.5% over the prior year quarter. The reduction was driven by lower material purchases on certain CMS programs and new business delays, partially offset by COVID-19 impact recoveries, particularly in our medical exam business. On a full year basis and after adjusting for acquisition and divestiture activity, the Health segment grew approximately 1% organically. Our Health segment continues to be our hardest -- our highest-margin segment, generating non-GAAP operating margins of 18.5% in the quarter, a record high. This 250-basis-point increase over the prior year quarter was driven by favorable net write-ups due to risk avoidance on certain programs, strong program performance on existing contracts and lower volume of business investments on a commercial IT venture. For the full year, Health segment non-GAAP operating margins were in line with 2019, increasing 10 basis points to 14.4%. The Health segment saw approximately $230 million of net bookings in the quarter, driving a book-to-bill of 0.5x, with a full year book-to-bill of 1.1x. And before I transition to next year's guidance, I want to give you an update on where we stand versus the 3-year financial targets that we shared with you at our 2019 Investor Day event. With 2 years now in the books, our organic revenue growth is running at 5.5% CAGR versus the 5% target we laid out at Investor Day. Free cash flow conversion of 127% is well ahead of our 100%-or-better target. And adjusted EBITDA margin of 10.6% exceeds the 10% established floor. As you may recall, we also had a $2.7 billion balanced cash deployment plan. And with 1 year to go, we've already deployed a total of $2.2 billion. As we head into 2021, our disciplined capital allocation philosophy remains the same. We remain committed to being appropriately levered and maintaining our investment-grade rating, returning a quarterly dividend to our shareholders, reinvesting for growth both organically and inorganically and returning excess cash to shareholders in a tax-efficient manner. Now on to our 2021 guidance, which does not include the Gibbs & Cox deal that we announced this morning. And as we've done in the past, we will provide an update at our next quarterly earnings conference call after the receipt of regulatory approvals and deal closing. For 2021, we expect revenue in the range of $13.7 billion to $14.1 billion, reflecting growth in the range of 11% to 15% over 2020. As we mentioned last quarter, we expect to grow more than 10% organically. This organic growth is driven by 3 factors: the contributions from contracts that successfully cleared protests, such as Navy NGEN and STAMP II; the accelerated recovery in our medical exam business; and growth from acquisitions and additional new business, including our most recent Niflec win in the Health segment. We expect adjusted EBITDA margins of 10.3% to 10.5% for the year. After adjusting for the $81 million net gain realized in 2020 from the VirnetX legal matter and the estimated COVID-19 impacts, 2021 adjusted EBITDA margins are consistent with 2020. We expect non-GAAP diluted EPS between $6.15 and $6.45 on the basis of 144 million shares outstanding. We expect operating cash flow in 2021 of at least 80 -- $850 million. This guidance reflects increased net income in 2021 and also incorporates the partial repayment of $65 million in 2020 CARES Act payroll tax deferrals, $50 million in burn down of the prior year's customer advances and $170 million of increased working capital to support 2021's top line growth. For additional context, the business has delivered 120% free cash flow conversion of net income across the 3-year time frame of 2018 through 2020. We expect to deliver above 100% conversion across comparable time intervals going forward. And one other item to note. While we may utilize our accounts receivable monetization facility from time to time for short-term or strategic actions, our 2021 operating cash flow guidance does not include any contribution from the facility that was established in early 2020. Now a couple of other comments to help you with modeling 2021. We expect net interest expense of approximately $179 million excluding transaction-related expenses. We also expect a slightly higher non-GAAP tax rate in 2021 of 22%. Capital expenditures are targeted at approximately $170 million, a 7% decrease from 2020. As you may recall, 2020 capital expenditures were elevated due to the real estate investment costs associated with the build-out of our new headquarters and other real estate optimization activities. Our normalized go-forward run rate for -- excuse me, for CapEx is targeted at below 1.5% of revenue. And with that, I'll turn the call over to Rob so we can take some questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Joseph DeNardi with Stifel. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [2] -------------------------------------------------------------------------------- Jim, just so we can have an idea in terms of the SD&A business and kind of how levered that is to recovery in commercial air passenger volumes, I mean how much of the $500 million that you're expecting from that business was kind of service-related versus more hardware? And maybe what's your assumption for that contribution from the business to 2021? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- Well, that business -- we don't guide by division, Joe. But what I would say is that the bulk of what you're seeing and what we talked about is it's roughly -- half of it is driven by reduction in product sales, where customers have deferred making orders or receipt of orders, and then roughly half of it is driven in lower services. And the reason for lower services is that with a lot of lanes closed, there's less machines that require surface obviously. And customers are looking for ways to reduce their outlays on that as a lot of this is funded by customer passenger fees and that kind of thing. -------------------------------------------------------------------------------- Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then, Roger, I want to ask this question in a way that maybe you can answer it, but there was a proxy filed on Friday that suggests that a company of your size made an all-stock offer, albeit at a lower price than where Perspecta ended up. I'm wondering if you could just talk about your willingness to use a meaningful amount of equity for M&A, just kind of the overall philosophy at this point on larger M&A. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. Thanks, Joe. Of course, we don't comment on deals that don't close and deals that may be in process or may not be. And what we have always said is we want to be smart in the market, and we want to have dialogue with all of our competitors and potential partners. And so we have a great relationship with the leaders in all the companies in our market space and we often have discussions. But on any particular deal at any particular time, I have absolutely no comment. We like our size and scale. We've said that in the past. We are really excited about the scope acquisitions that we have made in the last now 2 years and they've significantly added to our capability. But we have told you all and The Street is that we believe we have a responsibility to look at everything and provide some insight into what's going on in the marketplace to -- with our management team and our Board. And so we will take a look at everything. But you should look at the deals that closed. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question is from the line of Seth Seifman with JPMorgan. -------------------------------------------------------------------------------- Seth Michael Seifman, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [7] -------------------------------------------------------------------------------- I was wondering, I guess in terms of where sales came in this quarter, you've raised the sales guidance by $100 million at the last earnings and kind of just -- kind of bumped up against the bottom of the range in the quarter. You talked a little bit about timing of procurement and delayed new starts during the prepared remarks. I guess maybe can you elaborate on that a little bit, more where that stuff came up the most and how you see it kind of breaking loose over the next few quarters? -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [8] -------------------------------------------------------------------------------- Yes. Seth, let me start and talk about the programs, and then Jim can touch on numbers if he would like. When we raised our guidance, we had Navy NextGen was in the Court of Federal Claims. And we -- Court of Federal Claims is a little bit unpredictable, unlike the GAO process, which has a rigorous calendar and is kind of a 99-day thing. And it was our best estimate that the court of federal claims would rule, frankly, before the Thanksgiving holiday. I mean, at one time we thought it would actually happen in the second week of November. That did not happen. We didn't get a ruling out of the court of federal claims until December. So that delayed the start-up of the NextGen program by at least 1 month, maybe more. And then the other thing that happened, with this third wave of COVID, which I think COVID is very difficult to predict, our indirect costs went down even further as we went back to mandatory telework. And we saw our overhead and G&A costs go down even further than we had anticipated. And because about half of our portfolio is a cost-type contract, when we see a reduction in cost, it pulls revenue down with it. And those were the 2 major drivers. Maybe I'll turn it over to Jim if he wants to add some more color. -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [9] -------------------------------------------------------------------------------- Sure. Yes. And if you want to think about the delta between kind of the midpoint of our prior guide and where we ended up, it's roughly 4 things that are equally spread. Think of 1/4 of it being lower volumes than we had previously forecast in the medical exam business, we thought the recovery would be a little bit bigger there. It is the indirect rate issue, the indirect cost issue that Roger just alluded to. Then there was about 1/4 of it was COVID-19 impacts in the Civil group. And then the rest of it, about 1/4 of it, was just the delays in the program start-ups for NGEN and some other contract wins. -------------------------------------------------------------------------------- Seth Michael Seifman, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [10] -------------------------------------------------------------------------------- Right. Okay. Okay. That's helpful. Okay. And then so like when we see in the press release, you guys talk about the COVID impact. Is there -- is what's called out in the item in the press release, is that -- was that more than the $12 million on the top line? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [11] -------------------------------------------------------------------------------- I'm not sure I understand your question, Seth. Could you restate it maybe? -------------------------------------------------------------------------------- Seth Michael Seifman, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [12] -------------------------------------------------------------------------------- Well, yes, just like I think in the release, it talks about, for the quarter and fiscal year 2020, COVID adversely impacted revenues by $12 million. So is that kind of what you're referring to in terms of the COVID impacts on -- versus what you expected? Or is there -- is that sort of just an actual year-on-year decline due to COVID and then there were other things that were supposed to happen that didn't? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [13] -------------------------------------------------------------------------------- Yes. What you see us talking about during -- when we discussed our results a few minutes ago, it's the year-over-year declines relative to COVID. What we -- when we talk about the number versus what we had previously forecast, obviously, that's going to be different. So you've got 2 components. One, the year-over-year delta, but there's also the amount of business growth that we expected that got impacted by COVID-19 as well. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Next question is coming from the line of David Strauss with Barclays. -------------------------------------------------------------------------------- David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- NGEN, can you give us an idea, I think you've talked about the program ramping up to $600 million plus on an annual basis. Can you talk about what you have baked into that -- into your, I think, 10% revenue -- organic revenue growth guide for this year in terms of that program ramping up? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [16] -------------------------------------------------------------------------------- You mean for the guide that we had for 2020 or 2021? -------------------------------------------------------------------------------- David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- For '21. So in other words, how fully ramped do you expect NGEN to be in that 2021 guide? And how much do we have the benefit as you fully ramp in '22? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [18] -------------------------------------------------------------------------------- The ramp in NGEN revenue for 2021, we expect it to be ramping up, it will be about 2 to 2.5 points of organic growth for the year. So you can think of that as being somewhere in the $250 million to $300 million range. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [19] -------------------------------------------------------------------------------- Yes. And just to give you the programmatics, think about 3,000 people, about half Leidos employees. And we have a transition period, as you do in these programs. We're in the transition period. So we really haven't started the employee ramp-up. That will be gaining in earnest really in the second half of the year. And we will be close to fully ramp by the end of the year, but there will still be significant growth in '22. So you might expect another 2 to 3 points of growth from NGEN in '22 as well. -------------------------------------------------------------------------------- David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Okay. That's helpful. And Roger, you talked about your view on what happens with the defense budget from here. Given some of the acquisitions on the defense side of things, how would you characterize your exposure at this point, just looking at your defense business to the operations and maintenance portion of the budget as opposed to modernization? -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [21] -------------------------------------------------------------------------------- What, obviously, we've been doing even within our defense group is trying to adjust our portfolio so we're strong in the areas that we see growing. And the 1901 Group is really moving to as-a-service platform. And we've seen even in the $1.9 trillion, the Biden administration set aside some dollars for IT. So we continue to see IT modernization as a great place to be. We see modernization of what we would call newer technology platforms, hypersonics, unmanned vehicles. I mean -- and that's really what has got us excited about the one -- the deal that we announced today. But we always have a mix, and we've got some programs that -- where we support operations. We still have people deployed, although it's less than 1% of the business. Our philosophy has always been to try to balance. And again, we stay away from the large marquee platforms in the 3 services. Think of that as tanks and trucks and airplanes and big, big surface ships and undersea ships. We tend to be in what we think are the smaller, more agile, more responsive capabilities that our customers have. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from the line of Greg Konrad with Jefferies. -------------------------------------------------------------------------------- Gregory Arnold Konrad, Jefferies LLC, Research Division - Equity Analyst [23] -------------------------------------------------------------------------------- Just transferring from defense to NASA, under the new administration, maybe there's some changes or at least a pause where they kind of figure out the path forward. Can you maybe talk a little bit about the NASA opportunity, particularly at Dynetics, and maybe any expectations around that business? -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [24] -------------------------------------------------------------------------------- Well, I mean, I think we're like everyone else, we're waiting for a NASA administrator to be announced. We are enthusiastic about comments that the administration has made about the space program and about technology and the decision to keep the space council, which we think is a leading indicator. The space programs, both the military and NASA, have always been a source of innovation. And needless to say, I think all of us were glued to the television over the last couple of days and watched the Perseverance rover land on Mars and the excitement that it brought the country. So we're still very enthusiastic about our position with NASA, which is in Dynetics. But I would remind everyone on the call is that we have a significant NASA presence that existed before Dynetics. A lot of people don't know. We've always made the food that goes into space out of the NASA food lab at Johnson Space Center. Specifically about the lander program, which is I think where you'd like me to focus, we are at the end of what we call the base space contract, where we have done a preliminary design on our lander configuration. We have received a 2-month extension from the customer as they go about their competitive evaluation of the 3 bidders. And then we expect that they will make an award relatively on time, either in March or April, and that they will move forward with a lander development program consistent with the budget that NASA has remaining in 2021 and then whatever the Biden administration does for 2022. -------------------------------------------------------------------------------- Gregory Arnold Konrad, Jefferies LLC, Research Division - Equity Analyst [25] -------------------------------------------------------------------------------- That's helpful. And then just a follow-up to one of the last questions around kind of the breakout of the impact to revenues in Q4. I know you don't necessarily provide quarterly guidance. I mean, some of those headwinds have probably lifted, some of them maybe continue through 2021. When you think about organic growth throughout 2021, I mean is it more level loaded? Or should we see some acceleration as stuff like NGEN ramps up in the back half of the year and maybe some of the COVID impacts become a little bit less? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [26] -------------------------------------------------------------------------------- Yes. It's a great question. We definitely see the growth being more back-end loaded as we see some of these recent contract wins. And the resolution of the protests gives us the opportunity to begin ramping now in the first quarter. But it really isn't until Q3 and Q4 you're going to see the real impact of that. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our next question is from the line of Cai von Rumohr with Cowen. -------------------------------------------------------------------------------- Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [28] -------------------------------------------------------------------------------- So Roger, you just did these 2 acquisitions. Maybe give us a little color in terms of how much they would add in terms of revenues and maybe what their profitability is and kind of how they fit in. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [29] -------------------------------------------------------------------------------- Well, Cai, of course you know we don't do that. So we really -- they're -- they will both be in the defense segment. There -- again, we just don't-- we don't disclose revenue and EBITDA on our deals. And I'll come back to the strategic nature. And 1901 clearly fits with our digital transformation business, which is very significant for us, and accelerates our ability to offer services on an as-a-service basis, which we believe is a growing trend in the industry. Gibbs & Cox is an exciting opportunity for us. We've learned a lot about autonomy and the Navy business. And in our MUSV program, I think we had a very, very competitive bid, but we didn't win. And as good as we were about the mission equipment on the autonomy, I think there were things that we learned in naval architecture and ship design. And in the discussions with Gibbs & Cox, we're very excited about how Gibbs & Cox brings their capability around the design of the ship and the ship systems, and we bring, if you will, the mission equipment. And we're really excited about how that will fuel growth for our maritime business going forward. And Cai, we'll talk a lot more about Gibbs & Cox after closing. We're in that rather sensitive period between signing and closing, where we're starting to file all of our regulatory filings. And so we're going to let that get behind us, and then we'll reach out to you all and talk a little bit more about Gibbs & Cox and its history and where we see that going. -------------------------------------------------------------------------------- Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30] -------------------------------------------------------------------------------- Got it. And then maybe you could review for us the expected COVID impact, sort of what programs are the revenues not there because of COVID? And what are the milestones that could kind of turn those back on? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [31] -------------------------------------------------------------------------------- Well, I -- Cai, this is Jim. There are a number of programs that are impacted, but I'll just review with you some of the examples where COVID will have some impact into what we would normally see in 2021. First, with our National Science Foundation customer, the volume of people and material that have gone down to the ice and that are coming back, that will be lower. There's a significant construction project that we would have been doing now that has been deferred to a later year when COVID will largely have abated or be gone and not considered a risk of bringing COVID down to the Antarctic. Another example is, I mean, obviously, we've talked about the impact on the SD&A Business, where while we've had a revenue impact there, we're working to consolidate operations, get our cost synergies and get the combined business to margins that are well above where the pro forma had been on the acquisition date. The other COVID impacts, we're still recovering and getting to the what would be higher-than-normal volumes in the medical exam business. So that business has a lot of backlog to run off and that is included in our view of 2021. And then the places where we're not seeing a lingering impact, a significant lingering impact, is that in our intelligence business, the customers there are largely, not 100%, but they're getting pretty close to it. And we're pleased with where we see the volume and margin outlook in that business going. So those are a few examples. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [32] -------------------------------------------------------------------------------- Yes, Cai, I would just reiterate. We think we've taken a very thoughtful view of COVID in our guidance for 2021. And we've all learned a lot about this pandemic and how it affects the economy. And we've really, I think, taken a very informed view of how it affects our business and our programs. And there -- we could go through really 20 or 30 programs, our disability business. And there are ins and outs. There are some tailwinds because of some things that pushed from last year to this year that we're excited about. I mean, clearly, transportation, air travel is down and businesses associated with that will be down until the volumes come back. I mean it's just part of the reality. That being said, border and ports, that business seems to be going quite well. And so it is a mixed bag. And you should just take comfort is that we have gone literally program-by-program through our portfolio and taken a thoughtful view of the COVID impact for 2021 in our guidance. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question is coming from the line of Peter Arment with Baird. -------------------------------------------------------------------------------- Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [34] -------------------------------------------------------------------------------- Roger, Jim, Peter. Can you maybe just highlight a little bit about -- I'm just looking at the Health segment, just the margin performance there continues to be really impressive, about kind of the sustainability at these levels. When you think of that business, just all the moving parts that are going on and also the ramping up of the new contract there. -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [35] -------------------------------------------------------------------------------- Sure. Yes. Peter, the first thing that I would say is that, in our view, the margins there are sustainable. And while the Health business didn't have what we normally see in growth there, we continue to think of Health as being a place with above-average growth potential. And that's evidenced by our ability to win the 2 large programs, one of which is under protest in the Health group. That will get our growth track back to where you've seen it in the past. And then in terms of what else we like, the margin performance historically in the Health group has been because we're finding areas where we can apply our differentiated solution and our approach to solving customer problems with customers who are willing to pay us for the value that we bring, and again bringing margins that are higher than the average for the overall company. -------------------------------------------------------------------------------- Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36] -------------------------------------------------------------------------------- Okay. That's helpful. And just a quick follow-up. Just on recompetes. I know this is something that you deal with on a daily and annual basis. But is there anything you would call out thinking about -- when you're thinking about your growth outlook for this year heading into next? Any recompetes? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [37] -------------------------------------------------------------------------------- Yes. This year, coming -- the 21-year is going to have a lot less in terms of recompetes compared to the prior -- to 2020. If you think about -- we do have a large recompete with one of our intelligence customers. We only have one that is -- has a contract value of over $1 billion. And the second largest one is in Army Corps of Engineers. It's called HR3D. That contract is a little over $0.5 billion. And then we have a number of recompetes that are kind of in the $0.5 billion range. But definitely, 2020 was a year of recompetes, but not so much in 2021. But with that said, we have a record pipeline. We still have a record amount of bids that are awaiting decision by our customers, and we feel that 2021 is going to be yet another year of significant increase to our backlog. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Next question is from the line of Gavin Parsons with Goldman Sachs. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [39] -------------------------------------------------------------------------------- I appreciate all the color on the bridge, the year-over-year bridge for operating cash flow this year. But I just wanted to ask if you have still good visibility into the, as you call, the nonrecurring recurring benefits. I mean I think at one point for 2020, you've been thinking you could do as much as $300 million of factoring of receivables. So is that still an option for this year? I'm just curious why it didn't include any onetime items in guidance. -------------------------------------------------------------------------------- Roger A. Krone, Leidos Holdings, Inc. - Chairman & CEO [40] -------------------------------------------------------------------------------- Yes. Let me touch on some of the strategics then Jim can walk you through the details. First, we think we understand what the Biden administration is going to do on the payroll tax deferral. And so we put that into our guidance. There is some discussion that they may defer it. If so, that could be a positive, about -- we have $123 million in the deferral if they decide to defer it another year, not in the $1.9 trillion, but there's a subsequent bill that's likely to come, so that could be a nonrecurring item. On the asset-backed program, the accounts receivable, we use that when it's advantageous based upon cost of borrowing, right? And that's really what the facility is there for as opposed to like a revolver or commercial paper program or using a 364-day facility. So that goes in and out depending upon that advantageous interest rate. But the overall cash story really was we had a great fourth quarter, and we had some advanced payments. We got paid. We got -- had some nonrecurrings. And we far exceeded what we thought we would achieve in fourth quarter. And as a result, some of what would have been in 2021 happened in 2020. And we tried to take you through that reversal. And then this 10% to 15% growth that we expect next year requires working capital. We're a capital-light business model, but we still have working capital. And so when we grow just the difference between liabilities and assets, requires us to fund, and that comes out of cash. I don't know, Jim, you want to add more color? -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [41] -------------------------------------------------------------------------------- Yes. Just one thing on the -- what I think you used the same term we do internally here, Gavin, and that's the recurring nonrecurrings. We can't forecast what they are. There is a VirnetX issue out there that could come as a bluebird tailwind. We just don't know when it will come. It could be 1 year, it could be 2 years. And so that's not in our forecast. The other is customer advanced payments. We're 2 consecutive years now ending the year with previously unforecast big customer advanced payment balances. And we can forecast how we're working those off, but that could also represent some upside to operating cash flow when we look at it this time next year. -------------------------------------------------------------------------------- Gavin Eric Parsons, Goldman Sachs Group, Inc., Research Division - Associate [42] -------------------------------------------------------------------------------- Got it. That's helpful. And then maybe I could just try Cai's question on the COVID impacts again. Just I think you've been guiding for something like a $500 million headwind in 2020, including both the direct impact, the delayed starts and ramps and on-contract growth that didn't materialize. And obviously, that sets up a pretty easy comp in the back 3 quarters of the year. So just curious if growth guidance assumes that you recoup most of that or if you -- I know you said you've taken a conservative approach, but just curious how much of that you assume you'll actually recover in 2021 versus beyond. -------------------------------------------------------------------------------- James C. Reagan, Leidos Holdings, Inc. - Executive VP & CFO [43] -------------------------------------------------------------------------------- Yes. I think that our view is that -- and baked into our guidance is that there's probably about $150 million of that, $150 million, $160 million that is still unrecovered and really, in effect, pushing more to the right. So while there might be customer requirements that push into 2021, there's still going to be more movement of more work to the right, and that's what's implicit and how we're thinking about this. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to Peter Berl for closing remarks. -------------------------------------------------------------------------------- Peter Berl, Leidos Holdings, Inc. - Head of IR [45] -------------------------------------------------------------------------------- Great. Thank you, Rob, and thank you all for your time this morning and for your interest in Leidos. We look forward to updating you again soon. Have a great day. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.