Leidos Q2 2021 Earnings Call Transcript

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Provided by Quartr
August 3, 2021

Key Takeaways

  • Leidos reported Q2 FY21 revenue of $3.45 billion, up 18% year-over-year (16% organically), with adjusted EBITDA margin at 10.4% and non-GAAP EPS increasing 37% excluding one-time items.
  • The company secured $3.8 billion in net bookings (book-to-bill of 1.1) and ended the quarter with a record $33.5 billion backlog, driven by awards such as the $1 billion Reserve Health Readiness Program and a $470 million TSA screening contract.
  • Strategic acquisitions of Gibbs & Cox (naval architecture) and 1901 Group (IT services) have already broadened Leidos’ maritime and enterprise IT offerings, including support for the NGEN program and an ATF managed services extension.
  • The Board approved a 6% increase in the quarterly dividend, reflecting confidence in cash flow, while Leidos remains focused on debt reduction, maintaining its investment-grade rating, and balanced capital deployment.
  • Leidos expanded its workforce to over 42,000 employees with 4,500 hires in the quarter, emphasizing talent development, career rotations, vaccination incentives, and updated COVID-19 safety protocols amid the Delta variant.
AI Generated. May Contain Errors.
Earnings Conference Call
Leidos Q2 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Leidos Q2 twenty twenty one Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Stuart Davis, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, Hector, and good morning, everyone. I'd like to welcome you to our Q2 fiscal year 2021 earnings conference call. Are joining me today are Roger Krone, our Chairman and CEO and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and presentation slides that we'll use during today's call. Are participating.

Speaker 1

Turning to Slide 2 of the presentation. Today's discussion contains forward looking statements based on the environment as we currently see it and as such does not does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on Slide 3, During the call, we will discuss GAAP and non GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides.

Speaker 1

With that, I'll turn the call over to Roger Krone, who will begin on Slide 4.

Speaker 2

Thank you, Stuart, and thank you all for joining us this morning for our Q2 2021 earnings conference call. Our results in the second quarter reflect our leadership position in the government technology market. I am tremendously proud of the way Leidos has responded throughout the pandemic as our employees and business partners continually delivered for our customers and shareholders. While we remain vigilant with the recent uptick in COVID-nineteen cases, Leidos is stronger than ever with new quarterly record levels of revenue and backlog consistent with our industry leading are in the range

Speaker 3

of $1,000,000.

Speaker 2

As I look at the quarter, four messages stand out. 1st, our strong financial results demonstrate that our strategy is working. 2nd, our business development momentum is setting the stage for future growth. 3rd, we are effectively deploying capital to broaden our offerings in attractive markets. And 4th, we're building an engaged and effective workforce.

Speaker 2

I'll now drill down on each of these four key messages. Are ready. Number 1, our strong financial performance was highlighted by double digit organic growth and adjusted EBITDA margins above our long term target. Revenue for the quarter were $3,450,000,000 up 18% from the prior year on a total basis and up 16% organically. Adjusted EBITDA margins of 10.4% were in line with guidance and above the long term target we established 2 years ago.

Speaker 2

After adjusting for the one time gain in the Q2 of 2020, Non GAAP diluted EPS was up 37%. These results didn't just happen. Rather, they are a direct result of our strategy. We've differentiated ourselves within the market through scale, which creates a more competitive cost structure and expanded capability to take share and position in vital markets. We've also leveraged our cost structure to make key technology investments, which further separates us from our peers.

Speaker 2

Number 2, our business development engine continued the momentum that is driving our industry leading organic growth. We achieved net bookings of $3,800,000,000 in the quarter, representing a book to bill ratio of 1.1, Our trailing 12 month book to bill ratio is now 1.2. As a result, Total backlog at the end of the quarter stood at a record $33,500,000,000 which was up 9% on a year over year basis. In our Health segment, we were awarded a new fixed price contract with a ceiling value of almost $1,000,000,000 to improve the health of military reservists before, during and after deployment. Under this contract, known as the Reserve Health Readiness Program or RHRP, will provide physical, mental health and dental assessments along with laboratory and diagnostic services because more than a 1000000 reserve component personnel stand ready to support and defend our nation when it's called upon.

Speaker 2

It's our honor to support them. In our Defense Solutions segment, the Transportation Security Administration awarded us a $470,000,000 prime contract to integrate transportation screening equipment at airports all around the country. Based on our policy, we only booked a small initial task order in the quarter, Although we expect to achieve the full value over the life of the contract. This work is a reconfiguration of work we've been performing for over 12 years. And we also maintain screening equipment for TSA at all U.

Speaker 2

S. Federalized airports. Helping TSA ensure freedom of movement for people and commerce In our Civil segment, the Federal Aviation Administration notified us that they have given us initial tasking is part of a long term extension for the continued systems integration sustainment and enhancement are welcome to the EnRoute Automation Modernization or ERAM system. The ERAM system is critical for operations in the National Aerospace System and at the 20 Air Route Traffic Control Centers in the Continental U. S.

Speaker 2

We didn't book anywhere close to the $6,800,000,000 ceiling value, but it speaks to the confidence that the FAA has in Leidos. It. We expect to begin the 2022 government fiscal year with a continuing resolution, But customers will still be able to fund work in critical needs areas. Our positive outlook are in the range of $1,000,000,000 in standing of which $35,000,000,000 is new work for us. Number 3, We're deploying capital to complete our offerings in attractive markets to spur profitable growth.

Speaker 2

In May, we completed the acquisition of Gibbs and Cox, which brings us world class naval architecture, to design and engineering services. They designed 68% of the Navy's current surface combatant fleet are truly a national asset. This deal enhances how we're viewed across the Navy and opens up Significant market opportunity for us. Our strategic planning process had identified maritime as an attractive market where we were underpenetrated. To enable synergies, especially around unmanned surface and subsurface systems, Gibbs and Cox will be combined with Leidos' Maritime Systems division and operate under Dynetics are within the Defense Solutions segment.

Speaker 2

In addition, we're seeing early returns from our 19 oh one Group acquisition, which we closed in January of this year. Most directly, 1901 is providing significant support to the NGEN program transition and operations. They've significantly expanded their workforce, have grown the current enterprise IT operations center in Virginia and accelerated the establishment of new nGen service will be in San Diego, Norfolk and Boise. 1901's platform delivered IT services made them the best choice for the program's requirements in this area. 1901 was also instrumental in securing 125,000,000 follow on contract with the Bureau of Alcohol, Tobacco, Firearms and Explosives for Managed IT Services.

Speaker 2

1901's strong customer relationships with the ATF coupled with their efficient as a service delivery model made them key to the bid and execution strategies. In addition to deploying capital to spurn growth, we were also committed to returning capital to shareholders. To that end, our Board just approved a 6% increase to the quarterly dividend. This increase reflects the confidence of the Board of Directors and the management team in the quality of our earnings and our ability to generate cash. Number 4, this is a people business and this quarter offered further proof that we are an employer of choice that can attract the workforce needed to meet our financial commitments.

Speaker 2

During the quarter, we hired more than 4,500 people and at the end of the quarter, we were more than 42,000 are strong. Our headcount grew 6% sequentially and 11% year over year. Our ability to attract top talent in this manner is important as we staff up to successfully execute the new programs. One of the reasons we are attractive to job applicants is that we invest in talent management and career development. We regularly review talent and plan development actions, including rotations at all levels throughout the company.

Speaker 2

As an example, Executive Vice President, Jim Kantor recently announced his intent to retire after his distinguished 31 year career at Leidos. This enabled us to reconfigure our team to optimize performance given our rapid growth and the changes in market priorities. I asked Vicki Chimansky, who is leading our Intelligence Group to assume the new role of Executive Vice President, Corporate Operations. In her new role, Vicki will drive operational performance and implementation of strategic functional initiatives. Roy Stevens, who led Business Development and Strategy, succeeded Vicki as the President of the Intelligence Group.

Speaker 2

In addition, I asked Chief Human Resources Officer, Paul Angola to lead a strategic effort to chart our way forward in the national security space market. These changes will help us prepare for an uncertain future. A few weeks ago, we kicked off the $1,000,000 move the needle sweepstakes to encourage our employees to get vaccinated against COVID-nineteen and hasten are coming back together. At the time, all of our facilities were open and all vaccinated individuals were able to work without a mask. A lot have changed in the past weeks.

Speaker 2

The highly contagious Delta variant and the infection trends are disturbing. As we have throughout the pandemic, we'll comply with all CDC guidelines and most of our facilities will require masks Regardless of vaccination status, while we do not expect that our customers will be shutting down their offices again, we cannot be certain. In the face of that uncertainty, we have decided to keep our current forward guidance in place, for me, part of returning to normal is being able to get together face to face with our investors and analysts. It is our intent to host an Investor Day in New York on October 7. We have a compelling story to tell and we look forward to doing just that.

Speaker 2

We'll closely watch for COVID protocols from New York City and update you if our plans change. Finally, Frank Kendall has stepped down from our Board to serve as the Secretary of the Air Force. I want to thank Frank for his service to Leidos and more importantly to the Air Force, of Defense and the nation. I'll now turn the call over to Chris Cage. I'm delighted to have Chris step up to the CFO role and join us on these calls.

Speaker 3

Thanks, Roger, and thanks to everyone for joining us today. I've worked at Leidos for 23 years and I've personally benefited from the forward thinking developmental programs that Roger referenced earlier. My predecessor and mentor, Jim Regan, created a very strong team and set of processes and disciplines that I've had the opportunity to help shape over the last few years. Going forward, my initial areas of focus will be 3 fold: delivering on our financial commitments, integrating acquisitions in prioritizing spending on investments to execute our strategy. With that, let's jump right into the Q2 fiscal year 2021 results.

Speaker 3

Are beginning with the income statement on Slide 5. I'll first run through the financial results at the corporate level, then turn to the segment level to address the primary revenue and profitability drivers. As Roger said, the highlight of the quarter was our organic growth, which is truly unprecedented in our industry at our scale. Revenues for the quarter were $3,450,000,000 up 18% compared to the prior year quarter. Excluding acquired revenues of $58,000,000 Revenues increased 16% organically.

Speaker 3

Notably, revenues grew organically across all three reportable segments. The organic growth is somewhat inflated by the drop in our revenues last year as a result of the pandemic, when, for example, Our VA disability exam business was almost entirely shut down. Even if we add back the $132,000,000 direct pandemic effect in the prior year, Organic revenue growth was still 11%. Adjusted EBITDA was $359,000,000 for the 2nd quarter, which was up 5% year over year. Adjusted EBITDA margin decreased from 11.8% to 10.4% over the same period.

Speaker 3

Excluding the Vernexx gain from the prior period, adjusted EBITDA margin increased by 140 basis points in the quarter. This was primarily due to strong program management, are in line with our expectations. Non GAAP net income was $218,000,000 for the 2nd quarter, which was down 2 are in the range of $0.01 per share. This compares to the Q2 of fiscal year 2020. Including the impact of Verintix gain from last year's results, non GAAP diluted EPS was up 37%.

Speaker 3

Our Effective tax rate on non GAAP income in the quarter was 24%. Compared to the 22% we anticipated for fiscal year 2021, This negatively impacted non GAAP diluted EPS by $0.04 The tax rate increase was primarily across our international business. The largest single driver was that in Q2, we recognized the full impact of a recently enacted increase in the UK corporate tax rate from 19% to 25%. Now for an overview of the segment results on Slide 6. Defense Solutions revenues increased by 14% compared to the prior year quarter.

Speaker 3

Excluding the acquisitions of 19 oh one Group and Gibson Cox, organic revenue was up 12%, primarily from ramping up recent contract wins such as NGEN in increased weapon systems development within Dynetics. Civil revenues increased 5% compared to the prior year quarter with about half coming from the SD and A acquisition and half driven by increased demand on large programs such as Hanford Site Integration. Health revenues increased 62% compared to the prior year quarter and all of that growth was organic. We had a large year over year increase on the DHMSM program as well as a nice ramp on the new Military and Family Life Counseling Program or EMFLIC. The largest increase though was in the VA disability examination business in our QTC subsidiary.

Speaker 3

Remember, this was the business hardest hit by are in the year ago quarter and now volumes are higher than ever as we continue to work through the backlog of exams. On the margin front, Defense Solutions non GAAP operating income margin for the quarter came in at 8.3%, which was up 20 basis points compared to the prior year quarter. Civil non GAAP operating margin declined from 12.9% in the prior year quarter to 9.1% as we had fewer deliveries of our border and port security systems and airport screening systems. Finally, and most significantly, Health non GAAP operating income margin for the quarter was up to 17.8% compared to 5.3% in the prior year quarter. This quarter's strong margin performance benefited from the significantly increased revenue volume, but the year over year improvement was enabled by the are participating in the Q1 of 2019.

Speaker 3

Turning now to cash flow and the balance sheet on Slide 7. Operating cash flow for the quarter was $17,000,000 and free cash flow, which is net of capital expenditures, was a usage of $4,000,000 During the Q2, we settled the accounts receivable monetization program, which negatively affected our operating and free cash flow by $94,000,000 On a year to date basis, the AR monetization program is neutral to cash flow and we do not plan to sell any more receivables. During the quarter, we used working capital to fund the start up of new programs and the expansion of existing programs and drive strong organic growth. You can see this impact most clearly in the drawdown of advanced payments compared to last year. Cash generation from the business segments was right on plan for the first half of the year and actually ahead of last year, but that performance is overshadowed by one time non operational cash benefits in the first half of twenty twenty.

Speaker 3

These include $225,000,000 from the AR monetization program, dollars 85,000,000 from Vernetix, dollars 48,000,000 in CARES Act tax deferrals and $103,000,000 in lower cash taxes, which is just a timing issue. During the 2nd quarter, we paid down are in the range of $27,000,000 of debt and return $48,000,000 to shareholders in quarterly dividends. As laid out in Friday's 8 ks, our Board of Directors approved a 6 percent increase in the dividend beginning in September. This is our first increase in 2 years and reflects our confidence in the future outlook and commitment to shareholder returns. In addition, we paid net consideration of $376,000,000 to acquire Gibson Cox, which positions us to provide a broad set of engineering solutions to the U.

Speaker 3

S. And international navies. Gibson Cox is contributing a little more than $100,000,000 in revenues this year at margins above the Defense Solutions segment average, given its higher proportion of fixed price work. To finance the transaction, we borrowed $380,000,000 with a 1 year maturity at very attractive terms, no more than LIBOR plus 113 basis points. As of July 2, 2021, we had $338,000,000 in cash and cash equivalents and $5,100,000,000 of debt.

Speaker 3

Last month, we established a commercial paper program for short term liquidity management. Commercial paper will give us more flexibility at a lower cost than selling accounts receivable. Commercial paper is only available to us because our debt is investment grade and we view our investment grade rating as a strategic asset. Over the remainder of the year, our primary capital deployment priority will be debt pay down as we return to a normalized leverage ratio of 3 times. We remain committed to our long term balanced capital deployment strategy, which consists of 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.

Speaker 3

On to the forward outlook. As shown on Slide 8, we're maintaining our guidance for fiscal year 2021, including revenue between $13,700,000,000 and 14 are $1,000,000,000 adjusted EBITDA margin between 10.5% 10.7 percent non GAAP diluted earnings per share between $6.35 6 point to $0.65 and operating cash flow at or above $875,000,000 As the year progresses, we normally tighten our guidance ranges, There are a lot of forces at play, including potential worsening of the COVID situation with the more contagious Delta variant and are in the same period of time. As well as ongoing challenges in the global supply chain, especially around computer chips. On revenues, EnGen is ramping well, but this is still a new customer and new contract. So we don't want to have an established history of order flow and don't want to get ahead of ourselves.

Speaker 3

The intelligence community award decisions have slowed noticeably and we're also incrementally more cautious on the bounce back of the international airport screening market. So we're not forecasting a return to growth there until 2023. The Gibbs and Cox acquisition should keep us comfortably in our revenue range, but it likely won't put us above the range. We expect revenue to grow fairly linearly through the back half of the year from Q2 levels. Growth drivers in the 3rd and 4th quarters include the full contribution of Gibbs and Cox, the continued ramp on Engen, MFLIC and several other programs.

Speaker 3

Towards the end of the year, we expect the VA medical exams will begin to return to their pre pandemic levels. On EBITDA margins, Year to date performance for the 2nd quarter was 11.1%. To land in the guidance range for the year, adjusted EBITDA margin for the back half for the year will be around the same level as this quarter. Non GAAP diluted EPS will generally follow revenue and margin. However, we're now forecasting the FY 'twenty one tax rate to be between 23% 23.5% instead of our original 22% forecast, which slightly outweighs the accretion from Gibbs and Cox.

Speaker 3

In addition to the international tax headwinds I mentioned earlier, we're now forecasting a lower deduction for share based compensation are based on stock price performance over the first half of the year. Finally, we expect cash flow to follow our normal pattern and accelerate in the back half of the year to land us at the guided level. Over the past 5 years, we've generated an average of 65% annual operating cash flow in the 3rd and 4th quarters. That pattern will be slightly more pronounced this year as a result of the working capital that we have devoted the first half of this year to drive 17% year over year growth. We have a detailed execution plan to achieve our operating cash flow guidance.

Speaker 3

And with that, I'll turn the call over to Hector so we can take some questions.

Operator

Thank you. At this time, we'll be conducting a question and answer Your first question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Speaker 4

Hi. Good morning, Madhur. Good morning, Sheila. And welcome, Chris. Thank you both.

Speaker 4

So maybe, Roger, if you could comment on your Intel business, how large is it? And you mentioned some delays there. Booz, I think, was down mid single digits in the quarter. So maybe what's going on with the Intel customer specifically? And what sort of delays are you seeing?

Speaker 2

Well, it's a little bit larger than $2,000,000,000 and of course, it's in our Defense Solutions segment, so we don't really spike it out. The good news for us is after the quarter, we did win a recompete, which is below 1,000,000,000 But what we've seen overall is it just has taken them longer to get through their acquisition process And awards, recompetes, new business that we had put in our plan have taken literally months or quarters to come to fruition. And what that has meant for us and for others in the industry, call. But in the last quarter or 2, we really haven't lost a significant amount of business. It's just been Like a lot of things in COVID, things have just been moving to the right.

Speaker 4

Okay. And then maybe one quick one on margins. You guys did Really well with first half margins up 11% I'm sorry, 11% EBITDA margins and your implied guidance is 10%. Is this like the start of Chris' conservatism or is that maybe mostly due to the Civil margin impact Because that looked like it was down in the quarter, and I think you mentioned due to the security business.

Speaker 3

Sheila, this is Chris. Hey, and thank you. And No pattern of conservatism here, but we laid out some reasons to be cautious, right. And so there are some unknowns. Last year with COVID things whipsawed a little bit.

Speaker 3

So with Delta variant, we're being conservative there. We laid out For Civil, of course, we're expecting some uplift over time from the Security Products business and not just the aviation side, but the ports and borders, which show that business has performed very well for us on a legacy basis. So there are some puts and takes. We're Still intending to increase our level of investment on research and development. We built that into our plan all year long.

Speaker 3

And so some of that is are programmed in for the back half of the year, but we want to make sure that we can deliver on these commitments.

Speaker 4

Thank you.

Speaker 2

Thanks, Sheila. Thanks.

Operator

Your next question comes from the line of Robert Spingarn with Credit Suisse. Please proceed with your question.

Speaker 5

Hi, good morning.

Speaker 2

Hi, good morning, Ram.

Speaker 6

So Roger, maybe Chris, you talked about your attention to the top line guidance a couple of times here so far, but there are a bunch of moving pieces. And I was wondering if we could size some of this. Would it be right to characterize The Naval Architecture business is around, I don't know, dollars 80,000,000 $90,000,000 a quarter?

Speaker 2

No, we would say maybe $100,000,000 for the half. So and remember, that's about what we get. So it's about a half a year, call it, 100, maybe a little bit better than 100, and it's growing. But for the half that we'll book rounded to 100.

Speaker 6

Okay. And then is that and that's What you're thinking in terms of maybe offsetting downside from COVID? I know COVID is a tough discussion to begin with, but how are you thinking about that? Maybe another way to ask this, Roger, to is have your organic growth targets changed since Q1 for the 3 segments?

Speaker 2

Well, we're talking $113,900,000

Speaker 3

So I mean I'm

Speaker 6

not talking about that.

Speaker 2

Yes. I mean, not appreciably. Hey, Robin, you and I think the other folks on the call know where we were a year ago. And we thought we made a reasonable change a year ago, and we sort of walked into the 2nd wave. And I think we all learned that this COVID thing is unpredictable.

Speaker 2

Throw on to that the Shortage of computer chips and which and we usually get a lot of material deliveries in the second half. And although We've seen some lengthening in the supply chain. We don't see any shortages yet. But I just you all have taught us a great lesson in the last 12 months and I kind of like where we are. Yes, Gibbs and Cox gives us

Speaker 3

a little bit of lift, but there's a ton of uncertainty out there in the next 6 months. Yes, Robin, this is Chris. Just to add on to that, obviously, we do Detailed forecasts and ops reviews quarterly with all our business lines. And there's always movements, right, across the portfolio. Roger just talked About the Intel delays and so that might have been a business area where some of the things that we put into the pipeline haven't come out yet.

Speaker 3

We were hopeful that some of those would and potentially give some uplift. None of those have been lost. But there's always small movements within the portfolio within $13,900,000,000 mid point that we're driving towards. And so the Gibson Cox piece potentially helps offset some of that or give us some capacity for downside risk given the COVID situation.

Speaker 6

Okay. I guess what I'm really looking for is Because last year was so challenging and this year you're catching up a lot and you have a lot of good businesses that are growing. I mean, this obviously is a high growth year. You're the highest grower in the sectors we've discussed. Maybe high level, Roger, looking into the future, once things normalize, How do you see the growth patterns in the business?

Speaker 2

Well, we still see strong growth, But not at the level that we've just demonstrated. We've at our investor Meeting 2 years ago, we kind of talked about 5, right. And we'll talk about that again in October. So clearly, we're comfortable with 5. But what we have been doing over the last couple of quarters is really unprecedented.

Speaker 2

And I don't expect to paint another quarter like we did. And some of that certainly year over year is COVID recovery, but We've enjoyed a significant number of wins and a high percentage of our competes. So we are still very are bullish on our long term growth prospects, but not at the double digit level.

Operator

Your next question comes from the line of Kai Zahnrumah with Cowen. Please proceed with your question.

Speaker 7

Yes, terrific. Thank you very much. And so Roger, you won Aegis, but it's under protest. Maybe update us on that And on your larger outstanding bids, I believe they include nPlay, UDS recompete and the 3 point $5,000,000,000 FAA award.

Speaker 2

Okay, Kai. Thanks and hey, good morning. So we won the it's a NASA bid about in the order of 2,500,000,000 to you. It was protested by the incumbent. As it seems everything is nowadays, NASA is taking corrective action.

Speaker 2

And so it's a little hard to forecast to what the outcome will be. History has told us NASA takes corrective action. They make Kind of 100 days. And so it may take them another 3, 4 weeks to do the corrective action and then you tack just another 3 minutes on the back of that. So, we suspect we'll be talking about NASA aegis through the 3rd Q4 unfortunately.

Speaker 2

On DES, it's it. A big contract up at DISA. We're hoping it will be a 4th quarter award. It could easily slide into Q1 and I would suspect, Kai, that that will be protested it. One way or the other.

Speaker 2

The UDS bid, which is at NGA, which is in the Anomaly $4,000,000,000 to $5,000,000,000 a significantly large bid. We expected that to come out July August. There are some other things going on at NGA, which is in the Intel Group, Sheila's question, which may cause that to be delayed. This. It could happen in August, it could happen in September.

Speaker 2

Frankly, the acquisition team at NGA are really busy and when they get around to clearing the award, they'll make the award. We think it's 3rd quarter, but Yes, these things become ever increasingly hard to forecast. But those are the big ones that are out there. There's Some other things that are down in the $1,000,000,000 level.

Speaker 7

Great. Thank you. And then if I could follow-up On Sheila's question about margin, it sounded like you went out of your way to remind people that your long term target Is 10%, it's not 10.4%. I guess as we just look at next year, I would assume health, The margin has to be down because you don't have the VA catch up. If you get Aegis, that's below average.

Speaker 7

So that I assume Civil also would have downward pressure year over year. So is that calling out the 10% Just to be conservative or is there a real concern that realistically there's no way 10.5% is kind of anything you could do on a sustainable basis.

Speaker 3

Go ahead, Chris. I'm sorry, Roger. So, Cai, Chris here. I just was going to jump in on that. So First of all, we weren't trying to send a signal about 2022 yet, right?

Speaker 3

That's what we'll lay out when we get to Investor Day in October. But there's more going on What you pointed out and those are very astute observations. Number 1, Roger talked about 1901 and the contribution that's making to our portfolio and That would really be an enabler across not only the defense opportunities in Enterprise IT, but also into the Civil segment and others to help us deliver those capabilities more cost effectively and drive margin uplift. So we see that as something that will help us there. Obviously, In the Civil segment, margin will ride up with the recovery in our Security Products business and not just the aviation side, but as I mentioned ports and borders and there are opportunities whether it's within the infrastructure bill or otherwise with our customers internationally it for that line of business that we're very bullish on.

Speaker 3

So those things would help us lift margins in that area and we do have to be prepared for Health margins moderating back down a bit as the exam backlog works its way down. But again, that will still be a robust part of the portfolio on margin. So more to come in October, but I don't think you should read in that we're resetting to 10% longer term.

Speaker 7

Thank you very much.

Speaker 2

Thanks, Ken.

Operator

Your next question comes from the line of Gavin Parsons

Speaker 5

Roger, I just wanted to clarify your organic growth comment in response to Rob's question. You said at the last Investor Day, You talked about 5%, you're comfortable with that. Without getting ahead of Investor Day targets, can you just clarify if you mean you think you Continue to grow 5% on a multiyear outlook?

Speaker 2

Let's I want to be absolutely are clear. The long term outlook that is out is what we gave at the investor conference, Gosh, it may 2 years ago. And we raised it from 3 to 5, okay. We have done nothing to change that, okay. And that's what I was Just trying to articulate to Rob.

Speaker 2

That being said, our organic growth, frankly our total growth Has been really remarkable. And our book to bill, it's just been It's just been great. I mean, the team has done such a great job. I'm not going to update the 5% until October, But I've tried to give reasons why there should be a lot of confidence at 5 were perhaps better. So, Gavin, that's about as far as I can go.

Speaker 5

Okay. No, that's great. I appreciate the clarification. I just wanted to make that clear. And then,

Speaker 3

Chris, anything you could do to

Speaker 5

help us quantify the healthcare exam contribution? That business is running 30% above 2019 levels, but obviously you have some other growth drivers in there. So any sense of what maybe that business has grown versus 2019 excluding the lumpiness in exams.

Speaker 3

Yes, Gavin, I mean, as you can appreciate, there's some sensitivities on getting too far down into the portfolio Competitively or otherwise on that. But that's not the only thing that's going on in health. That's the point we wanted to make. We've told you for a long time that the DHMSM are ready to ramp up and those margins will be lower than other parts of the portfolio initially, but they'll have an opportunity to increase over time. And we've got 0 contribution from our HRP in these numbers, right.

Speaker 3

So that will be something that we'll look forward to next year to really ramp up as that program gets underway. Are looking to send more work our way over time. And so we're prepared to accommodate them and their needs however possible. And so the hope is that we can continue that as a nice clip.

Speaker 5

Thank you.

Speaker 2

Thanks, Kevin.

Operator

Your next question comes from the line of Matt Acker with Wells Fargo. Please proceed with your question.

Speaker 8

Hey, good morning, guys. Thanks for the question.

Speaker 2

Hey, Matt. Could you kind

Speaker 8

of update, what are your latest thoughts on the infrastructure bill and in the areas where you could see a benefit from that?

Speaker 2

Great question. Of course, we're hoping There'll be a rare show of bipartisan. That's looks like it's a $550,000,000,000 plus over what we would have seen. And there's a lot of focus on roads and public Transit and Water Systems, but we think broadband, airports, ports, waterways, security equipment. And then we think there's going to be emphasis on protecting the infrastructure and whether that be cybersecurity or grid hardening.

Speaker 2

That is right in our swim lane. And then we're really excited about 5 gs And frankly, 5 gs, really to everyone in the country, and we think that will spur Sort of another big investment in IT and IT technology is the ability of all of us To function from an edge device, the phones that we have today are just a beginning when we all have 5 gs. The functionality that you will carry in your pocket is going to increase by an order of magnitude and that with Cloud and as a service, we could see that as spurring a whole new round of investment and application migration. So we're very bullish. Now I will caution everyone, it's our typical federal government it.

Speaker 2

Authorize appropriate, then it gets distributed to the agencies, they put plans together, Then they put out RFPs and they have industry days and we bid. And I don't I want to sound too negative here, but it takes A long time for money like that to flow through the system to where we win contracts, we start performing, We turn it into revenue and then finally into cash and earnings. So it's all positive and it's positive for us not only because of our civil group, but Really across the board and everything that we do in technology, it's just it's going to be months or years away, are but overall positive.

Speaker 8

Thanks. And I guess, I guess on the COVID in this latest wave, it sounds like that's a big Driver kind of conservative guidance for the rest of the year. Just are you seeing any signs from particular areas that Maybe customers are considering closing down locations again or contracts getting delayed or Anything that you're seeing there? Or just is that sort of just cautious in the guidance?

Speaker 2

We haven't seen customers Like we did when we were talking about 3,610 of the CARES Act and the intel went to shift work. Yes. I'll just what we all know, I mean, the President comes on national TV and talks about a mask mandate, I know we all stand up and listen. We are essentially going back to a mask mandate are in the same store. We expect all of our customers to do that.

Speaker 2

A bigger concern for us it. It is really what's going on outside of the U. S. And as you know, we have significant operations in Australia, the U. K, the Middle East, and They are hunkering down again.

Speaker 2

In Australia, not only is it difficult to get in the country, it's difficult to get around the country You go from Melbourne to Canberra and to Sydney. And I think Chris addressed it Well, but our SD and A business and certainly the part that we acquired is heavily dependent on international business, which The volume is down, the money is not there. And although we have not lost any significant competitions In the SD and A business, we have seen many, many canceled and delayed. So I think the impact for us will be in our Civil segment In the business that we refer to is Security Detection and Automation. Get it.

Speaker 8

Thank you.

Speaker 3

Yes. Thanks, Matt.

Operator

The next question comes from the line of Peter Arment

Speaker 9

Hi, good morning. You actually have Eric Rudin on the line for Peter today. Just a quick one for me. With a lot of the focus across many industries today being on rising input costs and labor being the lion shares of yours. Are you seeing any pressure there?

Speaker 9

I know you mentioned the 4,500 new are higher. So any color on how you're offsetting these headwinds in the current environment? And then how much additional staffing is needed near term?

Speaker 2

Let's see. It's sort of a mixed answer. We refer to them as unicorns. So, someone with a lifestyle polygraph, a security clearance And can program in a computer language called Python, in the National Capital Region around D. C.

Speaker 2

Yes, we're seeing a lot of competition for that person. And in order to get the staff that we need, we have to compete. And that is driving up labor in those areas. In other areas, there's have a lot of people available. We've been able to meet our hiring goals.

Speaker 2

And of course, as we have said on this call, we have a strategy are ready to concentrate our work in the National Capital Region and move to areas of the country to where the workforce is more readily available. Our 1901 acquisition, which I know we haven't talked a lot about, has a significant have a presence in Blacksburg and a great relationship with Virginia Tech. And that was just one more reason why it was are attractive to us and it opens up a new workforce for us. We have a software development center in Morgantown At West Virginia University, we have 1 in Charlottesville at UVA and now we have 1 in Blacksburg. Overall, we're expecting to hire maybe a number that's in the 9000 to 10000 are new.

Speaker 2

And we're at the I think I said 4,500. We're a little bit better than that now Because of the Navy Next Gen staffing, which has continued to go very, very well and We have enjoyed what we call incumbent capture where people who are on the contract with the prior contractor have elected to come to work at Leidos. So we're actually significantly above that number. And so we are on track are ready to meet our hiring goals, but there's always that specific individual, a PhD in radiology, That's difficult to find, especially if you're geographically limited as you often are in the Intel business.

Speaker 9

Okay, thanks. That's very helpful. I'll leave it at one for me.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question. Joe, are you on mute? Yes, go ahead, actually. Your next question comes from the line of Tobey Sommer with Truist with Securities.

Operator

Please proceed with your question.

Speaker 2

Thank you. I was hoping you could speak to how you anticipate Wage inflation, should it sort of materialize and grip broadly impacting the business? And when you describe your answer, could you touch on the different contract types to the extent that that could be informative? Yes. Tobey, I'll start Yes.

Speaker 2

And Chris can come in with some of the numbers. We have a portfolio mix, which is a little bit It's almost fifty-fifty. It's a little bit off from that, which is fixed price. And some of our fixed price work is We call time and materials, but think of that as fixed rate, right? So it's so much per hour and the customer buys number of hours.

Speaker 2

And then we have what we call our cost reimbursable or cost type contracts. And let me start very simple and then I'll see I can address your question. Clearly, on the cost reimbursable work, if there is wage inflation, That is essentially becomes a pass through to the customer. And that's not as Maybe not quite as positive as it sounds because customers live on annual budgets. And if you're a NASA customer, you have X for a program in a given year, you don't have X plus inflation.

Speaker 2

And so if our wages increase inside a budget year, Often the customer will have to decrease scope because they don't have any additional funds to execute the program. And then of course on fixed price, we have said we will do a program or complete a task for a fixed dollar amount and they therefore rely on us to balance The cost per hour with the number of hours and our challenge and I think it will be the challenge across the industry, find new efficiencies in service and delivery to offset that inflation. And we're always trying to do that. It. That's why sometimes on fixed price programs, our profit margin might be a little bit better.

Speaker 2

It. And we'll just have to do more of that. Part of the again going back to our 1901 comment, the excitement about 1901 it. It has an as a service platform, which is really independent on labor. So we charge so much for a service and we use essentially application IT platform deliver that and there's a lot of opportunity for us to create new efficiencies through the service and delivery model.

Speaker 3

Tobey, this is Chris. Just to add To Roger's point, he hit most of the issues here. Every year we do a detailed Pricing build up, multiyear pricing build up for our indirect and our direct labor costs and certainly contemplate some level of inflation as we build multiyear projections around that. If it turns out that wage inflation is outpacing what we've estimated, we have an opportunity to refresh that, which we will do, and we'll build those costs in. And so you really are just, at any given time, you might win some contracts where you price them with the old rates.

Speaker 3

And to Roger's point, you have to find opportunities to drive are in the range of $1,000,000,000 but on the future bids, we're pricing in what we think it requires to execute the work. So We're very transparent about that with our customers and we've got good competitive intel on where we think we need to be on a price to win. So all those factors play into How do we deliver? How do we win work? And how do we maintain the margin profile that we're committing to you?

Speaker 2

Yes. Tobey, one additional thought, Just because I think it's a really thought provoking question. One of the things that we have seen is As we mix more college hires and less experienced employees into the mix, they We call labor categories and their wrap rates, they are they make less. And we've been thrilled with the quality of our less experienced workforce And their ability to do the job, and that's another lever for us as we increase our college hiring to use more of that newly graduated workforce in key positions. Thank you very much.

Speaker 2

And I wanted to get your perspective on continuing resolution and What sort of the date is you might expect that to extend at this juncture? It. Yes. I'll be really quick. We want to get 1 or 2 more questions in.

Speaker 2

We and I think everyone does expect participate. Thank you for that in either side of the aisle. I'd love to be optimistic and say we're going to get a bill before the end of the year, but I'm not. I think we'll run a CR through into the Q1, just everything that seems to be going on. That would be my forecast.

Speaker 2

And what that will do, as we all know, is the work that's under contract will continue. New starts will get delayed. By the way, news starts are getting delayed anyway. So, and as we have said again many times, I think, it. What is it, 19 of the last 20 years we've had a CR.

Speaker 2

So I don't see it as a big impact to our business. I would love to see a bill, but we're certainly able to handle a CR as long as it doesn't go past Q1. Thanks, Tobey.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question.

Speaker 5

Thanks. Good morning. Sorry, mute button got me. Maybe Roger or Chris, just following up on a prior question. Enterprise IT has been a big focus for you all and obviously a lot of success there with NGEN and now Aegis.

Speaker 5

I can't imagine it would be such a focus if that work was dilutive to margin. So is there a rule of thumb, say, for a 10 year contract when that work becomes accretive. Is it right away? Does it take a few years? Is it not until the end of the contract?

Speaker 5

How does that work generally?

Speaker 2

You mean accretive to our average margin or accretive to EPS?

Speaker 5

Accretive to your average question.

Speaker 2

Yes. There is not a rule, and it really it's customer by customer and competition by competition. We have some programs that start out and they are above our margin. We have other programs. Yes.

Speaker 2

RHRP, which is really not an IT program, but RHRP has a 6 month Very low level transition built in. So we won't see RHRP as accretive to margins until are Significantly into next year just because of the way the contract is structured. So there's not a particular rule of thumb, it. But we've generalized on this call in the past is that it takes us a while after we staff up and We have demonstrated performance to be confident and therefore to have to raise our accrual rate. But I'll turn it over to Chris.

Speaker 3

Yes. Joe, I'd say, usually we kind of say give us year and a half to 2 years. It depends. What we like about those contracts in general is there often whether a fixed unit rate or fixed price and we do think as we understand the environment better, participants introduce more efficiencies into the environment and drive savings that way through automation, through as a service, Etcetera. With workforce rebalancing, as Roger indicated, what can you get for lower level employees potentially.

Speaker 3

So Everyone's a little bit different. It depends on whether there's a transition phase, how that was bid, what they're paying you for. So really contract by contract.

Speaker 5

Got it. That's helpful. And then Roger, you said earlier that you can't necessarily expect to grow 10% every year, which is understandable. I'm just curious participate. If you see that because you're just trying to manage expectations, which is obviously fair, or do you not see the opportunities in terms of taking market share over the next couple of years that maybe you had a few years ago.

Speaker 2

Joe, it's really more the former. Without putting too many numbers out there, We intend this year to submit more proposals in aggregate than we did last year, All right. And we will look at our pipeline and we have a fairly well disciplined business development process where we go out early five to 10 years we build a pipeline of potential business. We are not constrained by opportunity. In fact, what we are trying to do is to call out of our pipeline earlier those things That are not, if you will, not in our strike zone.

Speaker 2

So we spend our new business funds more efficiently. But we will submit more proposals this year than we did last year and clearly last year we did more than the year before. So it's really not an opportunity. It. It is I guess I'd love to think we could grow 10% forever, and that we were sort of a Silicon Valley high-tech startup and it's just we've been very, very fortunate and we don't want to get too far over our skis.

Speaker 5

Thank you.

Speaker 7

Yes. Our

Operator

final question today comes from Mariana Perez Mora with Bank of America. Please proceed with your question.

Speaker 10

Good morning, everyone, and thank you. Hey, Marlon. So in your outlook, you mentioned the challenges related are in the supply chain and especially the lengthening in the supply chain of computer chips. Would you mind telling us and giving some

Speaker 2

I think I understood your question. Let me take a shot at it.

Speaker 3

The hacks so far on the supply chain challenges.

Speaker 2

We haven't seen a lot. We probably have seen and we install a lot of end user equipment as part of several of our programs. And so we buy from all of the household names that you're familiar with. And what we're talking about, it. Silicon wafers that then get converted into processors, both general purpose processors and Application Specific Integrated Circuits.

Speaker 2

And what we thought was COVID related and we kind of put it into a big category. As we sort of started to come out of COVID, we find That parts of the supply chain shut down in this lower end, computer chip market And is not coming back as quickly as anyone thought. And in fact, in some markets like auto, their concerns, some of Certainly at the wafer level that some of that capacity is not going to come back at all. We have not seen shortages. We have just seen delays.

Speaker 2

And we're planning couple of years out, but we have seen lengthening in especially for IT equipment Probably in the weeks to a month in some areas and material has a big impact on our revenue, it. Both good when it happens and bad when it gets delayed. And it's a part of why we're not touching guidance for the last 6 months. Although we're doing fine now, some of our contracts have significant material purchases plan for the last half of the year and out of an abundance of caution, we wanted to give you visibility and transparency into our supply chain.

Speaker 3

And I think, Mariana, it's definitely something we'll spend more time on as we build our 2022 plan, because as Roger indicated, we have key relationships with critical suppliers and we stay abreast of what's going on there. But while the IT T component of many contracts isn't always our highest margin contributor. It does contribute to revenue, and so therefore, it's fairly integral. So as we get to 2020 planning, we'll make sure we've got good line of sight on what the latest expectations are. But this year with the guidance range we provided, we think we gave ourselves some latitude for some potential delays, modest delays across the supply chain.

Speaker 3

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Stuart Davis for closing remarks.

Speaker 1

Thank you, Hector, for your assistance on this morning's call, and thank you to all joining in this morning and for your interest in Leidos. We look forward to

Operator

time. Thank you all for your participation.

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