Leidos Holdings Inc (LDOS) 2015 Q4 法說會逐字稿

Greetings and welcome to the Leidos fourth-quarter and calendar 2015 earnings results.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kelly P. Hernandez, Vice President of Investor Relations.

Thank you, Ms. Hernandez.

You may now begin.

Thank you, Rob, and good morning, everyone.

I'd like to welcome you to our fourth-quarter and calendar-year 2015 earnings conference call.

Joining me today are Roger Krone, our Chairman and CEO, and Jim Reagan, our Chief Financial Officer, and other members of the Leidos Management Team.

Today, we will discuss our results for the quarter and year ending January 1, 2016.

Roger Krone will lead off the call with comments on the market environment and our Company's strategies.

Jim will follow with a discussion of our financial performance and our expectations for the future.

After these remarks from Roger and Jim, we will open the call for your questions.

During this call, we will make references to year-over-year comparisons.

Due to the previously announced change in our FY, we will be comparing our just-released Q4 calendar 2015 results for the quarter ended January 1, 2016 with our previously reported Q4 FY15 results, which represent three months ending January 30, 2015.

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 provided on the Investor Relations section of our website at IR.

Leidos.com.

With that, I will turn the call over to Roger Krone.

Thank you, Kelly, and thank you all for joining us this morning for our fourth-quarter and calendar-year 2015 earnings conference call.

As you all know, on January 26, we announced our intent to combined with Lockheed Martin's IS&GS business in a Reverse Morris Trust transaction.

I am confident that the Leidos platform, the people, capabilities, and cost structure that we have built, will be further strengthened by the talented people and impressive capabilities of the Lockheed IS&GS business.

The application of our platform across this expanded business will result in improved profitability, higher growth in the long term, and an increased ability to solve our customers' problems in an innovative yet affordable manner, enabling us to maximize shareholder value.

We will provide further details on the proposed transaction in an Analyst Day which we expect to hold this summer.

In the meantime, our Team is focused on executing our core business, and that's what we would like to talk to you on today's call.

I am pleased with our fourth-quarter 2015 results and with the strong finish to a successful year for the Company.

We closed out the year with $5.1 billion in revenue, up from the prior year, and at the upper end of our guided range.

This reflects a solid fourth quarter, with revenues of $1.3 billion, up approximately 10% from the prior year, driven by growth in both the National Security and the Health and Engineering sectors.

Our GAAP earnings per share from continuing operations grew significantly in the quarter as well as for the year as we improved core operations of the Company and also realized a material gain on the sale of our former Headquarters.

GAAP diluted EPS was $3.19 for the year and $1.72 in the quarter.

Non-GAAP diluted earnings per share, which excludes the real estate gain and another $3 million of restructuring expenses, grew approximately 13% both for the year and in the quarter, to $2.89 and $0.78 respectively.

We had an outstanding year for cash flow, even beating the prior year's strong results, with $410 million of cash generated from continuing operations.

Our focus on improving cash efficiency drove a nine-day decline in DSOs during the year.

We ended the year with a cash balance of $656 million.

In 2015, we focused on optimizing the Leidos platform, the people, the capabilities, and cost structure.

This focus enabled us to deliver competitively priced innovative solutions to a broader set of customers and ultimately enabled us to outgrow the broader market and deliver substantial value to our shareholders.

From a people perspective, we continue to build our Leadership Team with diversity of thought, background, and expertise.

We further complemented the Leadership Team with impressive talent at all levels in the Company, in particular, in customer-centric roles throughout the Organization, including our most recent hire of Dr. Don Kosiak as Chief Medical Officer in our Health business.

We continued our investment in internal R&D, enabling us to stay at the at the forefront of technological innovation in our key addressable markets through our five core capabilities: C4ISR; cyber security; systems engineering; large scale agile software development; and data analytics.

We furthered our investment and began to realize some of the results of our internal crowd-sourcing platform to foster more technical innovation throughout the Organization.

We also engaged strategically with partners in order to complement our offerings and deliver optimal solutions for our customers.

And finally, from a cost-structure standpoint, we continue our relentless drive to streamline the Organization, divesting non-core businesses, particularly those that do not meet our capital-light business model.

Selling Plainfield, coming to a resolution on Gradient, and selling our former Headquarters all helped us optimize our balance sheet and our cost structure.

Since the close of the year, we have furthered our efforts to improve our cost structure by removing one layer of management across the entire Organization, and we continue to evaluate further improvements to stay competitive.

Winning our customers confidence to execute their most critical missions is the clearest testament to the power of these actions.

Our win with the UK Ministry of Defense to transform their logistics and procurement infrastructure and our win with the Defense Health Agency to re-architect and modernize their electronic healthcare records system are significant examples of this, not just because of their size and scope, but also because they are single-award programs with over 10 years of duration that give us significant visibility into our future and enable us to make investments required to maintain our technical leadership in the industry.

More recently our win with the US Army to design, produce, integrate, and test modified aircraft for the airborne reconnaissance low-enhanced program of record is a significant milestone in the Leidos journey.

As we have suggested for some time, programs in which we engage with the customer and are funded through OCO funds are an opportunity for us to deliver some of our most innovative solutions in a mission-critical time-constrained scenario.

We have always believed that demonstrating such solutions in this quick-reaction scenario through OCO-funded programs would allow our customers to realize the mission-critical contributions enabled by these technologies and then fund them through a program of record for longer-term use.

That is exactly how this win materialized.

A much earlier-stage program which are also quite proud of for it's potential mission-critical enablers is the ACTUV unmanned autonomous surface craft which we designed and developed for DARPA.

In a recent milestone on this program, we put the ACTUV vessel into the water in Oregon.

DARPA is planning on christening the ship in the spring and beginning sea-trials shortly thereafter.

I am proud of the work of our employees that enabled these and many other wins of similar importance to our National Security and look forward to more successes in the future.

As we look ahead to 2016 and beyond, the global threat situation continues to increase in complexity, and the domestic budgets are reflecting that.

The recent US budget agreement has provided needed stability, predictability, and strong budget funding levels for discretionary funding for contractors for the next two years.

Budget levels are a good leading indicator for our industry, but our revenues correlate more with outlays.

In the DoD, after four years of decline, the current government physical year represents an inflection point for discretionary outlays with a return to growth which is expected to continue through the government FY18.

This turn upward in current dollars is a positive sign, particularly after the significant drops in prior years.

We enter 2016 with a healthy market backdrop, two-year budget certainty, and a global environment which requires us to deploy our most innovative capabilities.

I am confident that we have the right platform to continue to win in this environment, both in the US and abroad.

My Leadership Team and I remain committed to continuing the conservative and thoughtful way in which we manage the Company, focused on growth, profitability, and cash generation.

With that, let me hand the call over to Jim Reagan, Leidos' Chief Financial Officer, for more details on the quarter and our outlook.

Thank you, Roger, and thanks to all of you for joining us on today's call.

We closed out the year on a very strong note operationally, reflecting strong execution across our businesses, as well as continued work to monetize our balance sheet.

Fourth-quarter consolidated revenues grew 10% year over year to $1.3 billion, driven by strength in both sectors.

Non-GAAP operating income in the fourth quarter grew 33% year over year to $105 million.

This strong level was better than expected, driven by operating performance in both the National Security and Health and Engineering sectors.

The GAAP diluted EPS of $1.72 was positively impacted by the $82 million gain on sale from our former Headquarters disclosed in August.

As we indicated previously, for non-GAAP purposes, we have excluded this gain and the related tax effects.

Our non-GAAP results also exclude approximately $3 million in restructuring charges as we further streamline our real estate footprint.

Non-GAAP diluted EPS from continuing operations was $0.78 per share, as detailed on slide 11 of the Investor presentation on our website, and was better than expected, primarily driven by the operating performance mentioned earlier.

Operating cash flow from continuing operations of $32 million was a highlight in the quarter and brought our full-year results to $410 million.

The strong operating cash flow in the quarter was driven by better-than-anticipated operating income and lower vendor payments.

DSOs ticked up seasonally, as expected, to 65 days, from 59 days in the prior quarter.

We exited the year with a healthy cash balance of $656 million.

This includes $70 million of cash received from the real estate sale, partially offset by our payment of two dividends during the quarter.

Shifting to our business development results, consolidated net bookings totaled $706 million in the fourth quarter for a book-to-bill ratio of 0.55, in line with seasonality.

For the year, consolidated net bookings were $7.2 billion, resulting in a book-to-bill ratio of 1.4.

We ended the quarter with $9.9 billion in total backlog, which is up 27% year over year.

As we noted before, bookings in backlog do not include the effect of either single- or multiple-award IDIQs until task orders are awarded by our customers.

The value of bids outstanding at the end of the fourth quarter decreased slightly quarter over quarter to $10.9 billion.

Let me turn to select sector results for Q4.

First, in our National Security sector, revenues increased approximately 4% year over year, to $848 million, as stability in our domestic business was complemented by growth in our UK program, which more than offset declines in our OCO-funded revenues.

When adjusting for the OCO decline, our NSS revenues grew 7.5% year over year, the strongest level that we have seen since the split.

This healthy level of core growth is encouraging, particularly now with additional budget clarity.

Now on to profitability.

Operating margins in our National Security sector increased in Q4 to 7.7%, from 7.2% in the prior year, due, again, to strong program performance.

Health and Engineering revenues for Q4 increased 20% year over year, to $432 million.

We are particularly pleased with this strong growth as it is fairly broad-based among the different businesses within the sector, including engineering design build, security products, and federal health, which is benefiting from the ramp of the DHMSM contract.

Operating margins for the Health and Engineering sector were very strong during the quarter, at 10.6%, which reflects the higher level of security products revenues and a lower level of indirect expenses relative to the prior-year period.

Now, moving on to guidance.

First, let me emphasize that the guidance ranges provided today exclude any impact associated with the proposed transaction with Lockheed Martin's IS&GS segment.

As Roger mentioned, we will provide further details on that in an Analyst Day which we expect to hold in the summer.

We expect 2016 revenues in the range of $5.1 billion to $5.3 billion, up about 2% at the midpoint.

This contemplates growth at the National Security sector being partially offset the ramp-down of a large program in our design-build business within the Health and Engineering sector.

We expect OCO revenues in 2016 to come in essentially flat with the 2015 level.

For non-GAAP diluted EPS from continuing operations, we expect a range of $2.75 to $2.95.

Operationally, we are factoring in a slight increase in margins, which is offset by a return to a more normalized level of Corporate expenses.

We expect net interest expense to be roughly flat year on year, at approximately $13 million a quarter.

In 2016, we expect our effective tax rate to return to a normalized level of approximately 37%.

For cash flow from operations, we expect to generate at or above $275 million during 2016.

The primary driver of the year-over-year decline in cash flow is an expected stability in our DSO level for the forward 12 months, having realized a nine-day reduction this past year.

We continue to believe our business model will result in a cash efficiency of well over 100% relative to our net income from continuing operations.

In conclusion, I am thrilled with the results we reported for the year, reflecting key wins, including LCST, DHMSM, and ARL-E, resulting in a book-to-bill of 1.4; the divestiture of a non-performing asset-intensive business in Plainfield; strengthening of our balance sheet as we reduced DSOs by nine days and monetized our former Headquarters; and finally, our entering into an agreement to combine with Lockheed Martin's IS&GS business.

The proposed transaction will only further our long-term growth prospects by allowing us to build on the solid foundation of Leidos with demonstrated success in delivering profitable growth through the diligent customer-centric efforts of our employees.

With that, operator, let's open it up so we can take some questions.

Thank you.

(Operator Instructions)

Robert Spingarn, Credit Suisse.

Good morning.

Good morning.

Roger, I know that you mentioned the transaction at the beginning of your monologue, and that's not really the focus or discussion today, but I thought I would ask you -- given the reaction in the shares, is there something you can point to?

Do you think the Street is missing something here and that you could clarify that?

I really can't talk about what the Street sees or doesn't see.

What I will reaffirm is, so we signed a deal on the 26th.

We've started our integration management organization.

We've had, with counsel present, numerous meetings with the folks at IS&GS.

We've gotten to know the team better.

We've gotten to further our due diligence, and we're only more excited about the transaction.

And now, we realize that these transactions happen when they want to happen, and we signed this deal on the 26th, and there was probably headwind in the market.

There was a bad tape.

There was a lot of information that came out.

We all saw the reaction in the short term, but we made this decision based upon the long-term value we think we can create in the transaction, and we are still very enthusiastic about where we are headed.

Okay.

And of course, my understanding of it is, your targets and your negotiations were all predicated on the numbers that we saw later that morning -- or simultaneous with your announcement -- from your deal partner here, so all of that is built in.

Yes.

Robert, as I'm sure you and the others on the call realize, a deal is the product of months of due diligence.

And we built our own forecast model based upon the information that was available to us in the data room.

That is the information that Lockheed used in putting out their guidance, so we were well aware of what their guidance was, and we took that fully into account in assessing the value of the transaction.

Okay.

Appreciate that.

Moving to -- you had strong bookings during the year, here.

You've talked a little bit about the market evolving, here, the budget inflecting.

How do you think bookings play out in 2016?

Rob, this is Jim.

When we take a look at what our pipeline is, we think that probably the best marker that we can see today is that no longer are the procurement folks in the agencies that we serve distracted by wondering whether there is going to be a continuing resolution, wondering whether they can make longer-term commitments on programs.

And now we finally have the appropriations done that reflect the two-year budget deal.

So, given that we have a big election year in play and a two-year deal, we are not going to have the same distractions that we've had every year for the past 10 years, quite honestly.

It's hard for me to remember when we had a two-year budget deal.

So I think that we will see probably a return to procurement officials thinking more of longer-term, multiyear contracts as opposed to extensions on existing work that used to be aimed at getting around the short cycle of funding that we had been experiencing for years.

Okay, and then just a final one, if I could.

On the OCO, I think you said flattish 2016 verses 2015, which I believe was just under $200 million.

The question is, is this a sustainable bottom at this point?

We think that it is.

I think that OCO budget is going to stay flat, and I think that it's going to be the thing that sustains the same operations that they have been for years that are not going to go away.

The threats over there aren't going to go away, and we're going to continue supporting our customers in those theaters.

Thank you both.

Bill Loomis, Stifel.

Thanks.

Good morning, and good results here.

Just looking at the security products business, there's a couple of competitors that had disappointing results in that segment.

Yours was obviously strong.

Was that just timing of awards that you saw coming over a period, because I know it's a lumpy business?

How do you see that playing out through 2016 and the market dynamics there?

And then also, if you could just help give us a sense of -- like, for example, in the March quarter, if we don't have a big product award, security product sale, what the normalized H&E margin might be?

Thanks.

Bill, we don't guide to specific margins quarter to quarter within segments.

But I can give you some color, though, about the security products business.

We did have, as we've said, a good Q4.

The great thing about, at least in my view, of our security products business is that it does have strong margins, and I think that they are going to hold up reasonably well even in this environment.

We do have some things in the pipeline for Q1.

And a lot of the lumpiness around that is not just the size of some big orders, but it also has to do with the timing of customer acceptance, the availability of ships to deliver product from the West Coast to points around the world.

So that's about the best color that I can give you about security products right now.

How about just looking at the 2016 revenue -- or margin guidance?

I know you're not giving details on segments and so forth, but can you tell us what that implies in terms of two things on H&E business: the commercial healthcare trends?

And then the security products business -- generally speaking, what's factored in the in the guidance for 2016?

Included in our guidance for 2016 is relative -- it's single-digit growth, low single-digit growth in security products.

And it also reflects the -- I think last year, we said that our commercial health business had bottomed; and in fact, we are feeling pretty good about where that's going now.

We've seen -- as you might expect, the DHMSM win gives us a new swagger in the market in the commercial side and enables us to strengthen our work force, and it gives us a different level of credibility with the commercial customer.

So we're feeling good about what the impact of the DHMSM win is on the overall health business.

So growth in 2016 on commercial healthcare, then?

That is way we're feeling about it right now, absolutely.

Thank you.

Thank you, Bill.

Edward Caso, Wells Fargo Advisors.

Thanks.

Congrats on a good quarter here.

Can you talk a little bit about what you are seeing in pricing in the market, and both in the government and your Health and Engineering space?

Do you believe it's bottomed?

Are you seeing acceptance at the procurement officer level of backing off of low-priced technically acceptable?

Just a feel for what is happening.

Thanks.

Thanks, Ed.

This is Roger.

In fact, I was at a meeting in the Pentagon Tuesday and was talking to a senior acquisition official at one of the agencies, and we had just this conversation.

What was interesting is, she has actually been talking to some of you all.

And her view was, frankly, that we are starting to move away from the LPTA fixture.

And on the customer side, they like having contractors with incentive contracts because we have fat in the fire, and they can drive, whether it be cost performance or technical performance, with contract structures.

And at that particular agency, we have actually had some conversations about things that we can do together to manage risk and keep incentives aligned with what the customer wants to do with the ultimate product.

So, yes, I would tell you I think that there's been a lot of movement away from LPTA.

And it is not just in the intel world.

It's in DoD, and we see that on fed civil as well.

In the DoD space, where is the cross point between your average pricing and the marginal pricing, assuming that LPTA and the big push the last few years has got that marginal pricing below your book that's running off?

Is there a crossover point here at some point in the future?

Positive crossover point?

If I understand your question correctly, Ed, I think you are asking is, if the marginal pricing -- in other words, the pricing on new work -- is going to get back to where our average pricing is on our existing backlog.

Is that what you are asking?

Correct.

Yes, I think we're actually getting pretty close to that.

Because when half of your business is cost-type work, you actually are required to price it based on cost.

And really what makes you competitive is not just your past performance and qualifications, but you've got to come up with a solution that allows you to get the job done with as lean a work force as you can.

So you are not just competing -- it used to be you competed on wrap rates, and it's not just that anymore.

It's wraps and solutions.

And that's where I think we are able to play very well.

And that's why, in some cases, we have won work and we're not necessarily the lowest cost anymore.

Last question.

Can you just help reset our expectations of what the Health and Engineering business has in it?

Roughly, the products, the engineering, the commercial piece, whatever?

Just help us understand, then, a broad percent of total terms, what the big pieces are.

Thanks.

Let's start with our health business.

Right now, our total health business is roughly one-third of it.

Let me just take a quick look here.

Yes, health is about one-third.

And then the engineering business is a little bit less than one-third.

And then the security products business is a little less than one-third.

Now, we also have a big piece of it that is commercial engineering, so let me give you what that offering looks like.

I'll start with engineering first.

We do a lot of process design and process buildout work.

It's manufacturing supply lines.

It's the design build business.

We also do airport design and airport modernization work -- that's more on the design rather than the build side.

And then we also have a line of business that hardens and supports the power grid for electric utilities.

And it's not just grid design, but it's grid protection, it's data system design, and we also do some work in cyber around that.

Then there is also a design build business, which is engineering, procurement, construction, cradle-to-grave work in a number of industries.

And then, of course, we've talked about the health business, both commercial and federal.

Thank you.

Cai von Rumohr, Cowen.

Thank you so much.

So at NSS, your bids outstanding were down to $8.3 billion, and yet you have this very large ARL-E IDIQ.

Could you give us a little more color?

You sounded more upbeat about bids, but any color you could give us on what book-to-bill target you might have for the year?

And any contour over the year of major awards that are coming up?

Cai, as you know -- let me start, and then I'll let Jim do the numbers.

On ARL-E, it is essentially a single-award IDIQ, and so we just booked the current part of that contract.

I think we've said we might expect that contract to be in the high $600 millions over its life, and maybe with O&M on the back end, it could be actually larger.

But we take this conservative approach to the way we book IDIQs, so the only thing that's in backlog is the current task order.

I'll just turn to Jim for a view of where we think we'll be book to bill.

Cai, just one of the elements of the delta that you were describing on the pipeline.

Two things: one, the pipeline was a little bit depleted as the budget battles that are now resolved moved through in the third and fourth quarter.

But probably equally important has been a business development process that is more carefully vetting opportunities to keep things that we can't compete in from making it into the pipeline, keeping us from spending the B&P dollars on things that we think that we're less competitive in.

So the outcome of that is going to be, in our view, higher win rates through the year and a more efficient use of our bid and proposal and marketing dollars.

In terms of where we want our book-to-bill to look, we want to continue to sustain a book to bill that is north of 1.0.

We had 1.4 book-to-bill this past year.

We were really pleased that.

And we want to continue to sustain that.

Do we think that, that's reasonable and achievable?

Absolutely, because, as a reminder, we've got a couple of big IDIQs that are single award.

One of them is DHMSM, where we have over $4 billion of capacity there, and we've booked to just under $100 million into backlog so far.

The ARL-E award is also a single-award IDIQ that we've booked roughly -- I think it's about $60 million on so far.

And as Roger just indicated, we expect that will go over $600 million and more.

And those are just a couple of examples of these single-award contracts where they're -- you can think of them as being some backlog because there are no competitors on them, but we don't put them in backlog until a customer gives us a task order.

And you'll see those task orders show up in book-to-bill in the future.

Great.

And maybe (technical difficulties) a little more color specifically on commercial health IT.

That's been a troubled business.

Where is that?

Is the book-to-bill really starting to pick up the profitability?

And also security products -- what sort of backlog?

Because that business has tended to bounce around over the years.

In the commercial health world, the book-to-bill in 2015 was south of 1. It started turning up in the latter part of Q4.

And in fact, the pipeline and recent awards there have given us -- as I had indicated earlier on this call, Cai, reason to feel pretty good about this.

We've made some changes in our sales force, and we have a new Head of Sales there and a new person leading the group who -- early signs are that there are some great results there.

I think that it's a combination of changing the leadership in that group, and also, again, the strength that our brand now has in commercial health as a result of leading the largest EHR implementation in recent memory as a result of the DHMSM win.

Great.

And then on security products?

On security products -- again, these are -- the sales cycle in some of these things are very long.

Some of the sale cycles are pretty short -- literally, under six months.

We've got a couple recent wins there.

I think that if you take a look at the pipeline there, we're thinking about that business as growing modestly into 2016 based on what our plans and pipeline are there.

And again, we think that margins are going to be holding up nicely.

Great.

Thank you very much.

Thank you, Cai.

Michael French, Drexel Hamilton.

Good morning, everyone, and congratulations on a good performance in the quarter.

Thank you.

Particularly, the margin expansion is impressive.

I have a question about each segment.

And just so I have this correctly -- in Health and Engineering, was all the improvement due to security products?

Or was that just the dominant factor in that segment?

That was one of the significant factors, but we've also got lower indirect expenses there.

We've been -- as Roger had mentioned earlier -- we have taken out a layer of management.

And it's that, plus we are looking really carefully at all elements of the cost structure, and we've been working to lean out the segment there.

I would also tell you that the other thing that helps us is that this year we won't have the Plainfield plant anymore.

That was a bit of a drag on margins.

And in 2015, we had an $11-million bad-debt charge related to another energy project that we had worked on that is now off the books.

Very good.

And NSS -- you talk about better program performance, and I was wondering if you could add some color on that?

And also, you discussed earlier the move from LPTA to best value, and does that play into potential future margin expansion at NSS?

Well, I wish I could point to a single program, Michael, or a couple programs that are resulting in margin expansion in NSS.

But it really has been pretty broad-based.

Part of it is because our award fees are holding up, and we don't have a significant level of margin erosion because of any problem programs.

Our programs are all running very strong.

Margins are holding up -- award fees are holding up nicely.

And as it relates to LPTA, I wouldn't tell you that any change in government buying behavior is resulting in margin expansion.

It really is program performance, and also management of indirect cost, which helps us on time and materials and fixed-price programs.

Very good.

Thank you.

May I ask a quick one about the transaction?

Sure.

There had been a lot of speculation before the deal was announced that Lockheed would seek to retain their commercial cyber business, but obviously, that's one of the assets you're acquiring.

I just wanted to ask, how important was that to you in the transaction?

And what specifically do you think the opportunities are there?

Okay.

Great question.

Let's see.

We really like their commercial cyber business, and it combines well with some of what we are doing.

They have, as well, a better customer list than we do.

It's actually quite a gilt-edged list.

In probably about three times our commercial cyber business, and they have made better headway in some markets.

We run a security operations center, which is pretty exciting.

We saw the two businesses complementing each other and helping us to build critical mass.

It was important in the deal.

It would be difficult to say any particular one part of the business pushed it over, but we were very enthusiastic to see it come, and the team at Lockheed has done a great job of growing that business.

Very good.

Thank you.

I appreciate it.

Thank you, Michael.

(Operator Instructions)

Amit Singh, Jefferies.

Hello, guys.

Thank you very much for taking my question.

Just quickly on the guidance -- the midpoint of your revenue guidance for next year points to a growth of around 2%.

But the midpoint of EPS guidance is expected to be below current-year levels.

And you've talked about margins expanding next year versus this year.

So just wanted to check -- what are the puts and takes there that will lead to the midpoint of EPS guidance being down?

I know you talked about tax rate slightly higher, but is there anything else?

And second, what was the normalized operating margin in calendar 2015?

Was it around mid 7%?

Let me start with your question on tax because I think that's probably the most -- I'm sorry your question about EPS being lower while we're talking about margin expansion.

The EPS number might be a little lower than what you would have expected, mainly because our normalized tax rate is going back up to 37%.

We benefited from some good tax planning in the past year, and the utilization of some capital loss carryovers that we couldn't take advantage of until 2015.

So that is probably one big driver.

Another one on margin -- while operating margins of the businesses are expanding in our view in 2016, right now we are returning to a normalized level of corporate expense.

We had some benefits in 2015 from some legal settlements that offset some of our corporate expenses, and we are not anticipating anything like that into 2016.

Thank you.

And on the transaction, if I may, one quick question.

You've previously talked about the EBITDA margins of the combined Company expanding I think around 150 to 200 basis point versus standalone Leidos currently.

But just wanted to get a sense on how capital intensive is this acquired business?

Should we expect an increase in your D&A and CapEx as a percent of revenue going forward as a combined Company versus Leidos standalone?

Amit, that business from a capital intensity standpoint is very similar to us.

I think you can think about the going-forward business as having a ratio of CapEx to revenue similar to what we are experiencing here at Leidos now.

All right.

Thank you very much.

There are no additional questions at this time.

I would like to turn the floor back to Kelly Hernandez for closing comments.

Thank you for joining us on our earnings call today.

We look forward to talking with you again next quarter.

Thanks again.

Thank you.

This concludes today's conference.

Thank you for your participation, and you may now disconnect your lines at this time.