Earnings Call: Q1 2021

May 4, 2021

Greetings. Welcome to Leidos First Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. May return to the queue for additional questions as time allows. Please note this conference is being recorded. I will now turn the call over to Peter Burrow with Investor Relations. Peter, you may begin. Thank you, Rob, and good morning, everyone. I'd like to welcome you to our Q1 2021 earnings conference call. Joining me today are Roger Krone, Our Chairman and CEO Jim Ragan, our Chief Financial Officer and other members of the Leidos management team. Today, we will discuss our results for the quarter ending April 2, 2021. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company's 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 two 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 the 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. Thank you, Peter, and thank you all for joining us this morning for our Q1 2021 earnings conference call. As we communicated in our press release this morning, I'm pleased to announce that Chris Cage will be Leidos' next Chief Financial Officer later this year. Chris will succeed Jim Regan, who has chosen to retire following a long and distinguished career, In particular, the last 6 years as my good friend and business partner. I'll have a few remarks on this transition Before I hand the call over to Jim, but first, let's jump into the quarter. 1st quarter results reflect the perseverance, Focus and tremendous execution of our employees and business partners. New quarterly record levels of revenue, Non GAAP EPS and backlog were achieved and significant organic growth was delivered across All business segments. This early momentum favorably positions Leidos to deliver on our full year financial commitments. Revenues for the quarter were $3,300,000,000 up 14.7% from the prior year And up 9% organically, underscoring our accelerated recovery from last year's pandemic headwinds And the early ramp of new business wins. Adjusted EBITDA margin of 11.7%, Up 240 basis points compared to the prior year period reflects strong program performance And the resolution of the longstanding MSA legal matter, which together delivered 45% growth Our non GAAP EPS of $1.73 for the quarter. Net bookings of $3,800,000,000 Resulted in a book to bill of 1.2 times and 1.3 times on a trailing 12 month basis. This increase, driven by success in both our Solutions and Health segments, established A record backlog of $32,600,000,000 for a 13th consecutive quarter, providing greater clarity and confidence in near term revenue growth expectations. I will now touch on a few of the major wins we received in the quarter that underpin our growth in backlog. In the Health segment, the company was awarded a new prime contract to provide non medical counseling to military service Members and their families through the Military and Family Life Counseling Program known as MFLCC. This important work will be conducted at approximately 100 U. S. Military installations or nearby civilian communities. We currently estimate revenues will be approximately $1,000,000,000 over the potential 7 year life of the program. This new award is especially timely with May being Mental Health Awareness Month. Military members and their families overwhelmed by deployment related challenges and responsibilities. Nearly 1 in 4 active duty service members Show signs of a mental health condition. Children of service members are especially vulnerable. 1 third of children with a deployed parent Have psychological challenges such as depression, anxiety and behavior disorders. Through our work on the mFLIC program, we provide Confidential counseling to alleviate stresses and enhance military members and their families' ability to cope with these challenges. Counselors aim to prevent the escalation of stress into harmful conditions. About a quarter of our employees are veterans, So this program is meaningful to us on many levels. Next, in the Civil segment, The company was awarded a prime contract by U. S. Customs and Border Protection to provide multi energy portal systems for non intrusive of commercial vehicles at land and sea ports of entry. Under the contract, Leidos will integrate, deploy and train CBP staff to use its VACUS MEP with low energy backscatter and high energy transmission cargo inspection system. The multiple award IDIQ contract has a total value of $480,000,000 and a 5 year base period of performance And options up to 10 years if exercised. And in the Defense Solutions segment, the company was awarded a prime contract by the Naval Undersea Warfare Center to provide engineering, technical and management services for the Naval Array Technical Support Center. Leidos will be responsible for production engineering, technical and logistics support of the U. S. Navy and foreign government's towed array assets. This single award IDIQ contract has a total estimated value of $149,000,000 Finally, the company was awarded contracts valued At $822,000,000 if all options are exercised by U. S. National Security and Intelligence clients. Though the specific nature of many of these contracts is classified, they all encompass mission critical services That helped to counter global threats and strengthen national security. Turning now to several notable accomplishments and events that took place We closed the 1901 Group acquisition in January. And as anticipated, The business is being levered across all of our business segments in both the performance of backlog programs and new program bids. The inclusion of 1901 Group's cloud based solutions and fully integrated service delivery platform will enhance performance on our customers' important missions and continue to differentiate Leidos' value proposition Across the defense, intelligence, civil and health markets we serve. Furthermore, as we shared with you on the February call, The Gibbs and Cox acquisition is nearing completion with yesterday's expiration of the HSR waiting period. With that gate cleared, we now expect the deal to close later in this month. Also, I want to take a moment to highlight the ongoing Significant progress with the DoD Healthcare Management Systems Modernization Program, otherwise known as DHMSM. The MHS Genesis electronic health record system is now 30% deployed and is currently live and operational At more than 42 military treatment facility commands across the country with nearly 41,000 active users. Notably, during this unprecedented global healthcare crisis, the system has provided advanced capabilities To support clinicians and providers, including 20 fourseven access to medical and dental records and effectively tracking COVID-nineteen cases and mass vaccinations. Since its initial award, The program has been expanded to include the United States Coast Guard and the National Guard and Reserve. We remain on schedule to deliver MHS Genesis by the end of calendar year 2023. Shifting to the macro environment. While we are still awaiting the release of the President's 2022 detailed budget request And subsequent multiyear defense projections, we are encouraged by last month's release of the high level budget request. While the recommended defense funding level was in line with our expectations, our innovative technology and strategic investments remain Squarily aligned with the administration's prioritization of certain critical need areas such as digital modernization, Cybersecurity, autonomy and hypersonics. Additionally, we are very pleased with the proposed 16% increase In non defense discretionary funding, this proposed growth supports the value proposition of our diverse Business portfolio, which extends beyond defense and intelligence into the federal health and civil markets, including Ports, borders and airport security. And while a continuing resolution in the fall is feeling like a near certainty, The typical annual disruptions may be muted given the no growth request for defense and the reality that under a CR, agencies With nearly $6,000,000,000,000 of congressionally approved relief and stimulus funding since the start of the pandemic In a pending $2,000,000,000,000 infrastructure request, we believe there could be additional opportunities for Leidos, particularly in our Civil segment. Areas of interest include airport and FAA upgrades as well as civil agency research and development. However, we will need to see the final details when they become available to better understand what is truly addressable over the multiyear infrastructure plan. With regard to the administration's decision to withdraw all troops from Afghanistan by early September, Leidos has been directed to leave the region within the same timeline. We currently estimate the revenue impact to be less than 1% of our Defense Solutions segment's current year revenue. While program level customer discussions Are still evolving, our best estimates have been incorporated into the guidance that Jim will cover later in the call. As we recently marked the 1 year milestone of this devastating pandemic at the end of Q1, I want to provide you with another update on our Leidos Relief Foundation and how it has been assisting Leidos employees who have been impacted by the virus. Since March of 2020, the Fund has raised and distributed Over $1,700,000 through generous personal donations from employees, members of the executive team and the Board of Directors, including company match contributions. With those funds, over 500 Leidos families The ongoing generosity of our colleagues is inspiring and a constant reminder of our share values, no matter the challenge. Finally, as I noted at the top of the call, I will close my prepared remarks with a few comments on the upcoming CFO transition here at Leidos. On behalf of our Board of Directors and management team, I want to thank Jim for his countless contributions to this company and wish him all the best in his planned retirement. Jim joined us 6 years ago and has been my steadfast advisor and business partner. Jim and his team has grown the business over 160%, built an investment grade balance sheet In strategic planning and M and A deal structuring for key transactions, value creation takes place In successful business transformations and building and nurturing culture and talent, And that is where Jim made the biggest impact for our employees, our customers and our shareholders. Thank you, Jim. However, I will save my goodbye since you'll be continuing to be an advisor through year end. Meanwhile, I'm pleased to share that our Board of Directors has elected Chris Cage as our next Chief Financial Officer, effective July 5 this year, the beginning of our Q3. Chris is a great example of the talent development and succession planning process here at Leidos. Chris joined the company in 1999 and many of you have had a chance to interact with him over the last several years As he has held a series of financial leadership roles with increasing responsibility, most recently as our Chief Accounting Officer. His financial experience and deep understanding of our business Has prepared him and therefore our company for continued success. Since it's May 4, before I turn the call over to Jim, I just wanted to say May 4 be with you. I will now turn the call over to Jim Ragan for more details on our Q1 results and guidance. Thank you, Vodger, for those kind words and thanks to everyone for joining us on the call today. Upon reflection, I've had a very fulfilling career And these past 6 years here at Leidos have been truly special on account of all of the passionate and brilliant people who work here. I deeply value the relationships that we've built and the accomplishments that we have achieved together. I have great confidence in Chris' ability to lead the finance And I look forward to working with him on a seamless transition. With that, I'll start by providing an overview of our Q1 2021 results followed by an update to the 2021 guidance. We are pleased with our strong start And growth momentum through the Q1 of 2021. 1st quarter revenue grew 14.7% over the prior year quarter And 8.9% organically. The increase in revenue was driven by the Dynetics, SD and A and 1901 Group Acquisitions, Growing on our existing growth on our existing programs and increased contribution from new programs. This solid start to the year aligns with our 4th quarter messaging and showcases our resilient program execution fundamentals with all segments delivering double digit top line growth. Adjusted EBITDA margins of 11.7 Grew 240 basis points over the prior year quarter. The increase was driven by program performance, mix And continued indirect cost management as well as the benefit from the successful settlement of the MSA legal matter. Excluding the positive impact of this $26,000,000 legal reserve adjustment, adjusted EBITDA margins would have been approximately 11%. 1st quarter non GAAP diluted EPS of $1.73 grew $0.54 over the prior year quarter, driven by strong execution and organic growth as well as the settlement of the MSA legal matter. Without the settlement, Non GAAP diluted EPS would have been $1.59 reflecting 34% growth year over year. Operating cash flows for the quarter were $239,000,000 Excluding the net proceeds from the accounts receivable monetization Facility, operating cash flows would have been approximately $145,000,000 The decision to utilize the The facility enabled us to buy back approximately $100,000,000 of Leidos stock on the open market during the quarter, which aligns with our long term balanced capital allocation strategy, which consists of being appropriately levered and maintaining our investment grade rating and 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. Additionally, 1st quarter operating cash flow does not Bookings of $3,800,000,000 were strong across all segments, resulting in a 1.2x consolidated book to bill And record ending backlog of $32,600,000,000 This represents 15% growth in backlog from the Q1 of 2020. Now for an overview of our segment results. Defense Solutions revenue increased 14.8% over the year year over year and 9.2 percent organically. Driving this strong growth was the Dynetics acquisition, The diligent execution of new programs such as the CBP traveler processing and vetting software system And growth on existing programs. As a reminder, consistent with our policy, Dynetics revenue will now be included in our organic revenue Defense Solutions non GAAP operating margins of 9.2% increased 2 40 basis points from the prior year period, Reflecting strong program growth on certain contracts, reduced indirect expenditures and the recovery of a previously reserved International receivable. Defense Solutions booked nearly $2,000,000,000 in net awards for the quarter, resulting in a book to bill of 1.0x1.3x on a trailing 12 month basis. In our Civil segment, revenues grew 17.1% from the prior year quarter and 6.1% organically. This growth was driven by the SD and A acquisition and volume growth on our existing programs. Non GAAP operating margins in the Civil segment grew 110 basis points year over year, driven by the net benefit from the MSA legal reserve adjustment, partially offset by lower margins on certain Partially offset by lower margins on certain programs. Civil recorded approximately $700,000,000 in net bookings for quarter resulting in a 0.9 times book to bill and 1.1 times on a trailing 12 month basis. And finally, Turning to our Health segment. Health segment revenues increased 11.5% over the prior year on both a gross and organic basis. This growth was driven by increased volumes on existing programs, including the continued backlog burn down in our medical exam business and timing of wave deployments on the DHMSM contract. Health segment non GAAP operating margins were strong at 18.6%, an increase of 310 basis points over the prior year quarter, reflecting increased volume and growth on programs with our VA and DoD customers And reduced business investments on a commercial IT venture. We expect elevated levels of non GAAP Operating margin to continue through the first half of twenty twenty one and return to normalized segment levels starting in the Q3. The Health segment booked over $1,200,000,000 net awards driven by the successful win of the military and family life counseling contract, which resulted in a book to bill of 2.1 times for the quarter and 1.6 times on a trailing 12 month basis. Before I turn to guidance, I want to give you a quick update on the $7,700,000,000 Navy Engen Program. Transition and on boarding are going well, but due to the late 4th quarter resolution in the courts, The pace of the ramp was lighter in the Q1. We expect the ramp to pick up considerably over the next two quarters, giving us confidence in the organic contribution in both this year and next as outlined in last quarter's earnings call. Moving now to the remainder of the year. We are increasing our guidance for adjusted EBITDA margin, non GAAP EPS And operating cash flow to account for 2 distinct items: the settlement of the MSA legal matter And the reduced share count resulting from our share repurchase during the quarter. Our guidance does not reflect the announced acquisition of Gibbs and Cox. As we've done in the past, we will provide an update in our next quarterly earnings call after the deal has closed. Our guidance range for revenue remains unchanged. We expect to deliver between $13,700,000,000 $14,100,000,000 of revenue for the year. We expect adjusted EBITDA margins for the year between 10.5% 10.7%, A 20 basis point increase at the midpoint from the previous guidance, reflecting the benefit from the MSA legal matter. As a result of the $100,000,000 share repurchase executed in the Q1 and the net gain from the MSA legal matter, We are increasing our non GAAP EPS guidance by $0.20 to a range of $6.35 to from the MSA legal matter, we are increasing our operating cash flow guidance by $25,000,000 to atorabove $875,000,000 for the year. This updated guidance assumes no full year contribution from the accounts receivable monetization And with that, I'll turn the call over to Rob so we can take some questions. Thank you. At this time, we'll now be conducting a question and answer session. May then return to the queue for additional questions as time Thank you. And our first question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Thank you very much. Good morning, Roger and Jim, congratulations on your retirement. Thank you. Good morning, Sheila. Good morning. Maybe just because you spent a few minutes on your prepared remarks talking about this, Roger, and obviously, there's an acquisition this morning from one of your competitors. Can you talk about your health division? How do you expect revenue growth to kind of work through with DHMSM 30% implemented at the moment or deployed. And just bigger picture in terms of the health market, how do you see it evolving, Whether the growth or just competitive nature of it? Well, let's see. On DHMSM, we'll be at our current Revenue level or higher for another couple of years. And Shelly, as you know, our health group It's traditionally been our highest margin and our highest growth area, and it's not surprising to us that others have seen the market As attractive as we have, and the interesting thing about the health market is it's always been highly competitive. And whether it's one of our competitors getting into one of our traditional businesses, it's just changing the name of the competitor. And it is a very much a commercial world. And we see The Biden administration, maybe the human infrastructure bill as it comes to pass is continuing to increase the spend And we think it raises the importance of agencies like CMS and Social Security. And that's going to attract maybe some new competitors and maybe some non Traditional competitors, which in our strategic view of the market, we have always expected. And we believe we are successful in that market because we offer a value added service to our customers and We are, if you will, sharpening our tools and getting ready for what we think will be a significant growth In the top line and the market overall. Thank you. The next question is coming from the line of Robert Spingarn with Credit Suisse. Please proceed with your question. Hi, good morning and congrats, Jim. Best wishes ahead. Thanks, Rob. On the defense margins, they were sequentially up and above the level you'd achieved Previously in any quarter last year, so I wanted to talk a little bit more about the drivers. You did touch on them. You talked about mix, etcetera. But And just whether COVID related margin pressure is easing there and if you can quantify the impact of the international receivable there? Yes. Just starting with the last one, think of the recovery on the international receivable as $2,000,000 or $3,000,000 or So, I think more fundamentally, the business has performed well on an execution basis. Yes. Companies with portfolios of our size always have a program or 2 that are Not making their planned margins, but the execution in the defense group has been going pretty well, including the strong management of indirect cost, Which has also been something that's provided them with a lift. Now that said, We do have an R and D budget that we under spent a bit in the Q4 and we expect The level of R and D spending to tick up a bit through the balance of the year, and that's important for our long term Strategic priorities that are going to grow the business at strong levels going forward. Last thing that I would say is that there As we think about the margin in defense for the rest of the year, it's going to continue to be strong. But I don't Think you should necessarily be thinking of the Q1 level as being something you'll see every quarter for the rest of the year. Jim, is that the case in all the segments? You touched on this earlier that the second half is just a little bit lighter because the first quarter or 1st half was elevated. Is that all three segments? Well, in Health, we've got the backlog burn down that we talked About that because of the way the operating leverage in that segment works, the margins are going to be a little higher than normal through the second Quarter of the year, those margins will tamp down a bit in the back end. But unless we find that Healthcare costs are lower than we expect. And if we find that our ability to generate proposals is more efficient somehow than we're currently modeling. I think that you can expect the margins to be a little bit lower in the back end of the year. And that is across the board, yes. Yes. Thank you very much. Sure. Our next question is from the line of Cai von Rumohr with Cowen. Please proceed with your question. Thank you very much. So Could you comment a little bit on the burn off of the backlog of the medical exams in the health area And what that means going forward? And then somewhat relatedly, Roger, you talked of the 16% increase in the Let me start with the backlog. So just for everyone on the line, we do Medical exams for those people who are looking for disability benefit, Our largest customer is the VA, but we do them across the board. And during COVID, there was a period of time we were shut down and a period of time that Our efficiency was diminished because of social distancing. And so there is an inventory or backlog of people who want these exams. And it grew pretty much through last year to really for us an all time high. Our commitment has been To work literally nights and weekends, to overstaff our clinics, to work off the backlog, and we're benefiting in this quarter By that, although we did have some weather in Texas and other states that tamped our quarter down just a little bit, But we think it will take us into the Q3 before we get back to a normal run rate. That's our best estimate today, Cai. And we look At that, well, the team looks at it every day. I look at it, Jim and I look at it on a weekly basis. We look at it by region and by type of exam, but we're making good progress. The backlog is significant, and we think it's probably going to Affects Q3 as well. And this is all positive, by the way, as it was severely negative a year ago. And we talked through that A year ago. As we think about the increase in the budget, and about all we know at this Point, Cai, is what agencies look like they're getting the increase and we're all waiting for the PB to come out. But it does look like these are agencies for which we have a significant presence and significant heritage contracts. It's civil infrastructure. It's also some health. I mentioned in my prepared remarks, There's going to be ports and borders and airports, FAA infrastructure. Those seem to be prime. There's probably going to be some roads and bridges, which is not really all that relevant to us. We think there may be some smart cities, smart highways, We do have some contracts with the Department of Transportation, so we may benefit there. But the details are yet to be revealed. And when we're on the call next quarter, we will have the budget and we'll be able to address those better then. But thanks for your question, Kai. Thank you. Our next question is from the line of Gavin Parsons with Goldman Sachs. Please proceed with your question. Hey, good morning. Good morning. Good morning, Gavin. Congrats to both Jim and Chris. Thank you. I wanted to follow-up just a bit on Cai's question there. That 16% Initial request number often that gets revised, but it does seem like there's more appetite in DC for raising non defense budgets maybe than there had been over the last few years. So I just love to hear your thoughts on kind of whether that growth rate in the mid teens or even double digits is actually realistic and what the request Messages for the multiyear FEDSIP budget outlook? Yes. Gavin, it's really hard to handicap The most watched sport in the National Capital Region, which is our political process, Yes, I think they're going to go to conference. I don't think they're going to try reconciliation, but they could. And if Senator Manchin from West Virginia has some influence, think they'll come down a little bit and defense may go up. There are some politicians that we talk to who say It's assume it's sequester and it's a tit for tat. So if you're going to take Civil up, you have to take Defense up. I don't think that's exactly where we're going to land. I think we're probably going to have a higher growth number on civil than defense. And by the way, the defense number, Depending upon whether you call it 704, 715 or 753 does include the pay raise and now OCO in the base budget. So if you look at it from that standpoint, the overall, you could say, has some downward pressure. The areas that we compete, We view as just generally flat. We are though, I think when the dust settles and we get through this year and we get a bill, are expecting Maybe a high single, low double digit increase on the civil side and that's going to benefit our health And our Civil group, and we've already, as you would expect, put teams together to try to anticipate Where those funds are going to be spent and to make sure that we're doing the prep work to get ready to provide Customers value on programs that they're going to come forward with. We actually think cybersecurity is a good area for us. We think DHS is what's called the CISA, which is their cybersecurity office, which tends to deal with cybersecurity in the dotcom space. We Both to get money in the base bill and money in the infrastructure bill. So cybersecurity overall looks like a good place to be. Thanks, Kevin. Our next question is from the line of Tobey Sommer with Truist Securities. Please proceed with your question. Thank you. Over the last handful of years or so, customers have been a little bit more willing to contract using Different methods that end up being more profitable for service providers. What's your expectation for sort of a flattening of the defense budgets meaning For the ability of that trend to continue and yield good profit margins for the space? Yes. Tobey, let me see if I can address your comment and I'll let Jim add is we tend to perform better When the contract is either fixed price or time and materials, where frankly, the risk of performance is on us And then we can invest and we can put in RPAs or something to drive more efficiency in the contract. With something we call a cost based contract, we're kind of limited on the earnings potential based upon the fee that we bid on the contract. And with fixed price, we again, we are almost immediately rewarded for technology and innovation on the contract. It's always hard to call trends and I'm not sure we've seen because not all of the officials have even been confirmed on the Biden administration, I wouldn't say that we have seen a trend away from T and M. When you started, I thought you're going to talk about OTAs. I would simply say OTAs are alive and well, and I don't see that changing. If and maybe this is wishful thinking, I would Like to see the customers go to more fixed price because I think it fixed their cost, so they don't have to worry about year over year plus ops And it gives us performance responsibility and then the ability to earn more over the life of the program if we can drive Efficiencies into the contract. I don't know, Jim, anything you want to add? Yes, just to follow on that, that also delivers a benefit for the customer because when we have More latitude in how to deliver a solution as opposed to something that's prescribed in a cost type contract. It allows us to help the Customers save some money too. And if you could just provide a little bit more commentary and color on The relative size of the opportunities within the infrastructure space, I think in your prepared remarks, you mentioned airports As well as research? Thanks. Yes. Let's see, I think it's Too premature to give you a number. But for instance, when I said research, We're safer, healthier and more efficient through IT, Engineering and Science and A lot of people have forgotten about our science work. And so, we run the National Cancer Lab For NCI as part of HHS, we also run the National Energy Lab up in Pittsburgh For the Department of Energy, and that's another great program where and we do essentially early stage 6.2 kind of R and D, and we expect certainly the Energy Lab in Pittsburgh, where in the last administration, We did a lot of work around coal and how we can burn coal cleaner and more efficient. We would expect this administration We'll spend a lot of money on renewables. And we see the charter and the work in the National Energy Technology Lab Really growing as we think about wind and solar and hydro. And so that will grow. And then there are a lot of other places. We do work on the Defense Threat Reduction Agency and really across the board, we do some work for the Army up in Fort Detrick, in the medical field. And so We don't talk a lot about it because there's not a big contract like Navy NextGen in our science work. But Our heritage of doing early stage scientific work is alive and well. And of course, as everyone knows, we were founded as the science Application company, and so we still have a fair amount of business, in that early stage work. I appreciate that. Thank you. Yes. Thanks, Tobey. Next question is coming from the line of Joseph DeNardi with Stifel. Please proceed with your question. Thanks, good morning. Thank you, Brian. Good morning. Roger, just on the FDA business, I think the When you all bought it was that it would be about $500,000,000 in sales and grow at 10%. It looks like you're running about $300,000,000 now. Where do you expect that run rate to be By the end of this year? And then what are you all looking for on the infrastructure side to kind of give you clarity on what Incremental opportunity that could provide for that business? Let's see. We obviously don't guide by Below, we don't guide by segment, much less by program. And so we're not going to do that now. We have said that the SDA Business overall has been impacted by COVID and there's less airport traffic and so that's affected the business. And more so overseas, where funding is tied to the ticket surcharges. So, we are going to be below Our business case when we bought the L3 business for this year. That being said, in the U. S, We continue to see strong activity by TSA and Customs and Border Patrol in buying equipment Because in the U. S, the purchasing dollars are really not tied to volume. They're tied to the federal budget. And as I said in my prepared remarks, we got an award on VACUS, we had gotten award on rail at the border. We are bidding on Upgrading, adding something called CT at the checkpoint, at major airports. We actually have a prototype in demo at Dulles. If you come and visit us, you will likely well, if you leave from here, you will go through our CT at the checkpoint scanner at Dulles Airport. And we would expect some of the infrastructure dollars out of the stimulus bill To be spent on ports and borders, maybe some on airport, and we're already looking at those opportunities. I'll also tell you that really country by country, some countries are down. There are other country opportunities that have popped up That were not in our plan. So, there's it's always a mixed bag. But if you were to walk away from the call, I want everyone to know that The pandemic still has affected the SG and A business. And where we might have expected we'd be fully recovered At the end of this year or into next year, we think it's probably the end of 2022, beginning of 2023 before we're back to normal volume. That's helpful. And then, Jim, a lot of focus on cash flow, obviously, last quarter. I'm wondering if you could just provide some perspective on The updated guidance for this year of $8.75 is that a level of operating cash that you can grow off of In 2022, if not, what are some of the headwinds you face there? Thank you. Yes, Absolutely. The change in the guide is really, as I said in the prepared remarks, The result of the expected cash coming in from the MSA settlement, we clearly believe that we should Be moving back toward a conversion rate of about 100%. The headwinds for this year really are The reversal of all the tailwinds we had last year. And going forward into 2022, The only real change in conversion would be because of significant growth that will require the funding of working capital for receivables. And think of that as being roughly the net amount of that net of payables is about 27 days of sales, Is the kind of the net working capital metric that we model based on? Okay. So it would be that working capital plus the Payroll tax, those would be the 2 primary headwinds in 2022? Yes, that is right. Okay. Thank you very much. Sure. Our next question is from the line of Seth Seifman with JPMorgan. Please proceed with your question. Thanks Good morning and congratulations, Jim. I just wanted to ask about the Civil segment. And If we back out the legal settlement there, the profitability was a little bit lower than we're used And sort of what drove that and if you expected to kind of move back into that sort of low double digit range In Q2 that we saw last year? Yes, Seth. Historically, the Civil segment has had A little bit more volatility in its operating income margin number, primarily as a result of the timing of delivery of product You know, out of the security products business and this year will be no exception to that. We have some orders that are in the pipe That, are being built probably, we'll see those ship in the second half of the year and you can probably see Volatility on the other end for that, that's what our forecast is telling us. Okay. I'll stick to one. Thanks very much. All right. Thank you, Seth. Next question is coming from the line of Mariana Percemora with Bank of America. Please proceed with your questions. Good morning, everyone, and congratulations to Jim and Chris. Thank you very much. Good morning, Marianne. So my question is on SG and A. Yesterday, Raytheon announced a contract award from the TSA to expand the deployment of checked baggage screening equipment to all federally managed airports Nationwide. Can you please describe what was light as well in that contract and also like discuss competitive dynamics on that business? Yes, Marianne, it's a great question. The contract that you're bringing up, we did not bid on it. That is a that's a contract to support the maintenance of the checked baggage screening Machines and we chose to really pursue a path of bidding on the larger contract, which is Checkpoint equipment of all kinds, whether it's screening machines or scanners or trace We were concerned that to try to bid both of them could compromise our ability to get the bigger And about competitive dynamics there, Who are the main competitors and how has that over the last year? Well, we currently hold What I think is the largest contract for the maintenance of the checkpoint screening equipment And while the TSA has divided that up, we have consistently gotten good performance ratings and we think that we're well Positioned to win a big piece of that work later this month. Thank you. Thank you. Our final question is coming from the line of David Strauss with Barclays. Please proceed with your questions. Thanks. Good morning. I wanted to see if you could provide an update on Dynex. It looks like The revenue run rate there, just based on the disclosure around the acquired revenue was a little bit lower. Is that just seasonality? And then, anything you can say with regard to the lunar lander and the protest there? Thanks. Well, let's see. I'll start off. I'll let Jim kind of catch you up on numbers. First of all, The Dyntix integration and the team is going really well. Their growth on a standalone basis is really eye watering. And we've integrated our Leidos Innovation Center into Dynetics to better cross fertilize our technology with their technology. And That has really created a lot of excitement and we will see dividends of that in quarters to come. But the performance at Dynetics is really solid and they continue to win Programs in their relevant area and our hypersonic glide body facility is up and running, I was down there 2 weeks ago, 3 weeks ago. It's gone classified. We actually have parts that we're building and really across the board, Dynetics is going well. I will give you a little bit of insight on HLS. I can't give you much. So there were 3 bidders, 2 of which everybody in the country knows and us. And the contract was given to SpaceX. And upon our debrief and our review, We felt that things needed a closer look and so we did I will protest and I'm not going to disclose a lot of what's in our protest. There is some stuff out on the web. There was actually A good article written out of the Washington Post that I would refer you to and I would also caution that the Washington Post is owned By one of the companies that was a competitor, but I still thought that the article was very thoughtful And is a good basis of trying to understand what's going on in the HLS program. And because a protest is really sort of It's not quite a lawsuit, but certainly a dispute with a customer. I'd just rather not comment at length on our Yes, but they typically last about 99 days. And so in a couple of months, We will see what comes out of the HLS program. Yes. And in terms of the numbers, it's our policy that we don't include Pro form a pre acquisition revenues and calculating our growth rate. And so we didn't include strong growth that Dynetics had On a standalone basis last year in our gross numbers, now that it is We had it for a year. We are including it, and we do expect that on as it is a Part of the Defense Solutions segment, we expect that to show some continued growth into 2022, 23. Hey, Jim, I think the question may be around, we break it out in Page 14 of our calculation in the back. But after 12 months, we break it off. And so what you're seeing the what I see is the 83 number. Yes, the $83,000,000 that's a stub period. So don't you should not think of that as being the Q1 revenue from Dynetics. And so I think, David, what you might be seeing is just a partial period there, and it might be misleading you to think that the revenue is down in Dynetics when in fact Dynetics is Still continuing to perform well. It would be to close at the end of January a year ago. So that's Early February. Yes. Yes. I was Comparing to $83,000,000 for 1 month versus kind of what your had been your $300,000,000 quarterly run rate the last couple of quarters? Yes, I think that's just a little it's just a timing thing. Yes, for sure. Yes. All right. Thanks very much. Yes, okay. Thanks, Andy. Thank you. Thank you. At this time, I'll turn the floor back to Peter Burrell for closing remarks. 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. Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.