Leidos Holdings Inc (LDOS) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Leidos First Quarter 2018 Earnings Results.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Kelly Freeman, Director of Investor Relations.

Please go ahead.

Thank you, Rob, and thank you, everyone.

Good morning.

I'd like to welcome you to our first quarter 2018 earnings conference call.

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

Today, we will discuss our results for the quarter ending March 30, 2018.

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 discussions contains forward-looking statements based on the environment as we currently see it and, as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Finally, during the call, we will discuss GAAP and non-GAAP financial measures.

A reconciliation between the 2 is included in the press release that we issued this morning and is also available in the presentation slide.

The press release and the 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.

Roger?

Thank you, Kelly, and thank you all for joining us this morning for our first quarter 2018 earnings conference call.

Our first quarter results demonstrate a strong start to the year, with notable performance in bookings, profitability and cash generation.

Our book-to-bill ratio of 1.02 in the quarter is the highest level for our first quarter since our corporate split back in 2013.

We realized $2.5 billion in net bookings, exiting Q1 with a balance of $17.6 billion in total backlog, over $700 million above the prior year period.

Win rates continued their upward trajectory across all types of program awards: recompetes, new business and competitive takeaways.

These results demonstrate a good return on the investments we have made in our business development, people and processes.

While we see opportunities for further investments in driving new wins, we are simultaneously focused on increasing the value realized from our existing contracts awards and IDIQ vehicles.

Bookings in the quarter also reflect strong performance in this area, with notable contribution from on-contract growth, as our program and account managers work with our customers to deliver value to their missions through additional scope on existing contracts.

Strong program performance in the quarter was another highlight and reflects a notable theme that ran through all of our segments.

Our track record in this area continues, as evidenced by the sequential and year-over-year improvements in adjusted EBITDA margins.

As our customers are faced with organizational changes, program transitions and shifting priorities, their ability to rely on Leidos to meet and exceed our commitments has earned us high program award fees.

Cash generation in the quarter considerably outperformed our expectations and marked the first time in 5 years that we have seen positive cash flow from operations in Q1.

This positive cash largely reflects a higher-than-expected level of advanced payments, offsetting the typical Q1 cash flow items and the working capital build due to the financial systems transition during the quarter.

We took advantage of this higher-than-expected level of cash flow to commence share repurchases in the quarter.

We expect to continue to participate in the market from time to time to repurchase shares of our stock at a minimum to offset share [accrete].

During the quarter, we also successfully completed the financial systems transition, which was the last notable milestone in our integration and cost synergy plan.

The conclusion of that activity allowed us to successfully achieve our cost synergy goals for the IS&GS transaction of more than $400 million.

This is a result of hard work and difficult decisions by every department in the company.

We're proud of what we have accomplished and the more efficient and flexible cost structure, which we can offer -- with which we can offer innovative solutions to our customers.

Q1 also yielded positive developments in the macro environment.

The government fiscal year 2018 funding was finalized in the omnibus agreement signed into law on March 23.

This agreement includes increases for both defense and non-defense agencies.

The upward climb in defense budgets, which began in fiscal '17, are set to accelerate with the 2-year agreements for fiscal '18 and '19, which adds $80 billion and $84 billion, respectively, over the sequester caps.

Given the lateness of the completion of the funding cycle for fiscal '18, the Pentagon does have some end-of-the-year flexibility to spend these increases, which is encouraging.

The domestic discretionary budget for fiscal '18 is up almost 9%, a dramatic swing from the administration's initial request of a $54 billion decrease.

The combined defense and domestic discretionary increases for fiscal '18 and '19 total $296 billion.

The improved certainty in the budget authority and spending levels has also, we believe, driven early signs of more longer-duration program awards from our customers, a welcomed reversal of many successive quarters of declining duration in our backlog.

In addition to the higher budget authority, we are also encouraged by increased level of awareness and desire to streamline and accelerate the procurement processes, particularly within the Pentagon.

Overall, we are off to a good start for the year, and we are pleased with the positive early indicators of our future growth.

Our industry-leading scale, cost structure, talented people and innovative capabilities are competitive differentiators, and we have been able to leverage these to improve our win rates and drive increases to our backlog.

My team and I remain committed to focusing on growth, profitability and cash generation to deliver value to our customers and employees and return capital to our shareholders.

Before I conclude, I'd like to mention that we have recently finalized the date for our next Investor Day, which we plan to hold in September.

We look forward to sharing further details with you regarding our strategy and our position in key markets at this event.

More details will be provided closer to the date.

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 everyone for joining us on the call today.

Overall, we're pleased with the bookings, profitability and positive cash from operations in the quarter.

As we've previously indicated, we're intensely focused on driving growth throughout the business, while maintaining adjusted EBITDA margins at or above 10%.

To that end, I'll start by sharing some bookings commentary before providing additional context to our financials.

As Roger mentioned, during the quarter, we realized $2.5 billion in net bookings, resulting in a book-to-bill ratio of 1.02.

Following the increased budget certainty, we're encouraged that awards in the quarter reflected longer-duration periods of performance, enabling an increase in our average backlog duration after several quarters of declines.

Bookings in our Defense Solutions segment drove much of the net increase, more than doubling from the prior year period.

We generated over $1.6 billion in new bookings in the quarter in Defense Solutions, resulting in a book-to-bill of 1.4x, the highest book-to-bill in this segment since we closed the IS&GS transaction.

The awards were driven by a relatively broad set of customers and types of work, but contract awards from our classified customers were a notable highlight.

We were awarded $1.3 billion of work by our national security and intelligence clients to perform mission-critical services that help to counter global threats and strengthen national security.

Bookings in our Civil and Health segments were in line with the prior year levels, reflecting wins with the FAA, Department of Homeland Security, Veterans Affairs, and the Department of Health and Human Services, along with many others.

Now moving to the P&L, starting at the top.

Consolidated revenue in the quarter declined 5% from the prior year.

Roughly $60 million of the $137 million year-over-year decline was driven by timing of revenue recognition on certain programs, which delays revenue recognition into later in the year.

While this disproportionately affects the first quarter comparison, we do expect to recover these revenues throughout the rest of the year.

And as I'll mention in my discussion on cash flow, in certain cases where revenue is now delayed until later in the year, the customer has already paid us for these orders.

Excluding this impact, revenues declined about 3% from the prior year quarter, reflecting program wind-downs from prior year losses as well as a lower level of volumes on several other programs, notably in our Defense Solutions segment.

Despite the lower revenues, adjusted EBITDA margin in the quarter increased by 20 basis points from the prior year to 10.2%, the result of considerable focus by our groups on delivering strong program performance, which resulted in a higher level of program fees as well as a higher proportion of Leidos direct labor on contracts.

Net interest expense of $34 million was largely in line with expectations.

During the quarter, we made further progress in continuing to reduce the cost of capital.

We again successfully repriced our Term Loan B facilities, reducing interest rates on the $1.1 billion portion of our outstanding debt by 25 basis points.

We also entered into additional swap agreements, moving $250 million of our floating debt to fixed, bringing our total exposure now to about 70% fixed, 30% floating.

We are comfortable with this mix, but we'll continue to monitor developments on the yield curve to ensure that we're operating at the optimal cost of capital for our organization.

Given this mix, a 100 basis point incremental move in LIBOR would result in an approximately $7 million to $8 million of additional annual interest expense.

Non-GAAP diluted EPS from continuing operations of $1.03 reflects the strong margin performance discussed earlier as well as the slightly lower-than-expected effective tax rate across a fully diluted share count of 154 million shares, flat from the prior quarter.

Note that we did resume share repurchase activity during the first quarter and expect to continue to be in the market from time to time in order to hold our share count flat at a minimum.

Cash flow from operations was unseasonably strong in the first quarter, largely reflecting advanced payments from customers for materials procured for certain contracts, which, as I mentioned earlier, are expected to generate revenue later this year.

This more than offset the use of cash resulting from the financial systems migration implemented during the quarter.

Now that migration was completed on plan and on budget.

While the migration resulted in the expected temporarily elevated level of DSOs ending Q1 at 71 days, we do expect a return to a more normalized invoicing and billing process in the second and third quarters and a commensurate higher level of cash generation resulting from the associated DSO reduction.

The successful conclusion of the financial systems migration represented the final material element of our integration activity plan.

And the savings generated by this enabled us to attain our gross cost synergy goal, which, as Roger highlighted, was more than $400 million, driven by the combination of the 2 businesses.

Despite the achievement of our transaction-related cost synergy targets, we will continue to focus on ensuring an optimal and lean cost structure, including executing some of the real estate consolidation driven by the deal.

Now that said, having achieved our cost synergy targets and given the level of materiality we expect from the remaining real estate-related activities, after this report, we will cease to provide further updates against the cost synergy targets from the IS&GS transaction.

We ended the quarter with cash and cash equivalents balance of $215 million, down from the prior quarter level due to -- due primarily to 2 items: first, a $105 million cash outflow due to the resolution of an outstanding deal-related item with Lockheed Martin disclosed on our last call.

$81 million of this $105 million is included as an investing cash outflow with the balance reported as an operating cash outflow.

Second, financing activities drove an outflow of $91 million due to typical Q1 items: dividend payments, debt payments and, as referenced earlier, share repurchase activity.

We expect Q1 to be the low watermark on the cash balance, as is typically the case.

We remain committed to our capital deployment philosophy, which balances investing for growth, regular quarterly dividends, debt pay-down and share repurchases, to enable an optimal cost of capital while also driving increased value for our shareholders.

Now let me share some color on our segment results.

In our Defense Solutions segment, revenue was down 9% in the quarter, a disappointing number that reflects 2 key items.

First, this segment was more significantly impacted than any other by revenue recognition timing items discussed earlier.

Specifically, $50 million of the $116 million year-over-year decline in revenues was due to timing of revenue recognition on certain pass-through costs.

This is purely a timing item, and we expect to recognize the revenue from this aspect of the contract over the course of the next 3 quarters of 2018.

Second, the remainder of the decline was driven by a combination of lower volumes on some programs and wind-down of other programs as prior year award decisions now become fully reflected in revenue.

As we discussed on prior calls, following a review of those losses from 2016 and early 2017, we made changes to our business development organization and processes.

Those changes have already begun to pay dividends for us and improved win rates, as mentioned earlier.

Non-GAAP operating margins in the Defense segment improved by over 130 basis points from the prior year quarter due to a continued focus on delivering exceptional program performance, which generated a higher level of program fees.

In our Civil segment, non-GAAP operating margins also improved by more than 130 basis points on flat revenues over the prior year, reflecting profit writeups due to strong program performance as well as improved profitability in our international business.

Health segment revenue and profitability declined year-over-year.

However, the magnitude has been less than expected.

Relative to the prior quarter, non-GAAP operating margins in our Health segment increased 50 basis points despite the flat revenue, as our team has done a good job of getting in front of customers, performing well on their programs and driving customer awareness of the value of the Leidos commitment and technical solutions.

This helped drive a higher level of program fees awarded by our customers, resulting in increased profitability in the quarter.

Across our organization, our teams remain focused on executing well on all of our programs, while helping our customers navigate the changing landscape of their priorities and challenges.

With that, I'll move on to our [2018] guidance, which remains unchanged relative to our prior view, with revenue in the expected range of $10.25 billion to $10.65 billion; adjusted EBITDA margin in the range of 10.1% to 10.4%; non-GAAP diluted EPS is expected to be in the range of $4.15 to $4.50 per share; and cash flow from operations at or above $675 million.

In conclusion, we are pleased with the strength in our bookings and financials in the first quarter and remain confident that we are well-positioned to drive growth in the business and to achieve our targets.

Rob, with that, let's now open it up to take questions.

(Operator Instructions) Our first question comes from the line of Jon Raviv with Citigroup.

Roger and Jim, you -- last year around this time, you talked about some surprises, and you referenced on your prepared remarks that you made some changes to count with those surprises.

But you also mentioned that Defense is maybe a bit disappointing in the quarter.

So can you give us a sense for what drove -- what's behind the disappointments and how will you improve from here?

Well, I think last year, about this time, we had lost a couple of programs that we kind of -- we viewed as part of our base going forward.

And a little bit of the decline in revenue that we realized in the first quarter is really the tail of that.

And the disappointment was in pulling the 2 companies together and focusing on synergies, in getting the teams pulled together, we had to assess whether we had spent the right amount of time external as we had spent internal.

And so over the last year, we've really worked hard with our business development organization and our customer facing, we call them strategic account executives in our Washington office, to spend a lot more time out of the office and with the customer.

And we're really pleased in the quarter that we can point to some of our numbers now that show a return to growth and a book-to-bill over 1.

And then just give us a sense, I mean, your guidance for the year implies, I think, still 1% to 5% year-on-year growth.

The first quarter is down a bit.

How should we think about the trajectory through year-end in terms of hitting that growth?

Jon, great question.

Obviously, you can do the math.

We reaffirmed our guidance, so obviously, we still feel very positive about the year.

And so you've got 1 quarter in the books.

And we don't guide on a quarter-by-quarter basis, as you know, but you can kind of do the math.

And we have always hinted that this year would start slower because of some of the disappointments we had 12 months ago.

But all of the signs, our performance, our award fee scores, our book-to-bill and, frankly, all the external factors relative to the omnibus for the federal government we see in both defense and non-defense, gives us confidence that our guidance is rock solid, and we feel really good about the prospects for the year.

Our next question is from the line of Cai Von Rumohr with Cowen and Company.

So in the first quarter, when we were under a CR, you delivered a very respectable book-to-bill.

And Roger, you mentioned how strong the FY budget is, both on the Defense side and Civil better than expected.

So I would assume we're going to see book-to-bill pick up.

Maybe give us some color on what you've seen since the budget got appropriated and maybe some sense as to where the book-to-bill for the year could be.

Thanks, Cai.

Great question.

Boy, I hope my forecasting ability is actually that good.

But what we have seen since the omnibus is a significant number of awards.

And frankly, some that came in after the quarter.

We announced that we won a program with the Army Corps.

Now we'll see if that gets protested.

We won a couple of other significant programs in the first quarter and then after.

Of course, some of those get protested and so we can't put those in the backlog.

But we've seen, if you will, the logjam of significant awards, and I'm talking 3-digit millions finally get awarded.

And we're hoping that, that pace will continue.

I see no reason why it won't in the conversations that we have with customers.

And these things that have been in evaluation and in the process for months, sometimes, much longer than months, are now starting to get awarded.

And we feel good that we will get our appropriate share of those.

So what we've said is that book-to-bill will again be north of 1. And in order to make the numbers work, of course, with the revenue guidance that we have out there, that we have to book higher than 1 for the full year.

Is it expected that given you did so well in this first quarter under a CR, that you might be at something like 1.1 for the year?

Maybe give us a range or a guess, if you could, as to where you see the book-to-bill.

Yes.

I know, Cai, and I appreciate the question.

And we don't guide book-to-bill, as you know, we guide on revenue.

We've come back and reconfirmed our revenue number.

And you've got our book-to-bill and you kind of know what's in backlog, which is up, which is really a significant thing for us to have backlog up.

And you'll have to do the math on your own.

But I understand your logic, and it seems pointed in the right direction to me.

The next question comes from the line of Noah Poponak with Goldman Sachs.

If I'm doing the math correctly, you'd have to grow 8% organically on the top line the remainder of the year to come in at the high end of the revenue range.

Is that in the scenario analysis here?

Yes, this is Jim.

Noah, your math is right.

And given where we see bids in evaluation today and the expected timing of those awards, we're still very confident that we will be in that range.

We're already seeing a significant pickup in our hiring.

And in some cases, we have some confidence to hire ahead of certain kinds of awards and certain task orders that we're expecting under IDIQs that are already awarded.

So that, combined with -- last year, we saw some significant on-contract growth.

And we're still seeing robust, we call it OCG, a robust OCG going into the second quarter, which further gives us confidence of our ability to hit those kind of rates.

On the bookings and the wins and where backlog is coming in, I always thought I should be more focused on the funded backlog, especially when predicting a 3 -- the next 3 quarters or remaining 3 quarters of a year or certainly, the next 12 months.

And the funded backlog is down a couple hundred million bucks in the quarter.

Why should I not be looking at that, maybe even a little concerned with that versus the total backlog?

Noah, in our business, some large contract vehicles or large contracts are funded in relatively small increments, and I think of some of the work that we do in Health.

But we focus in terms of how we run staffing, how we run our internal forecasting and planning more based on what the size of the contracts are.

We obviously have to worry about funding to make sure that we get paid on time, but we don't look as much at the funding levels because of some of the vagaries on some of our larger contracts.

Noah, I would add to that, unlike maybe a company that builds airplanes and is doing advanced procurement, our customers are pretty reliable in spending the contract value.

And then the funded versus unfunded, of course, the accounts have made our life complicated now that there's a third term in our financials, which is a GAAP definition.

But in -- I think you see this across our competitors as well.

The unfunded number is perhaps a more reliable indicator of future growth than unfunded would be for a company that was hardware-oriented.

And that's why there's more program and funding issues within agencies as to what actually gets in the current [claim] versus the next claim . And we've got one program with a 3-digit agency that the contract value is almost $1 billion, and the first claim was only [$60 million].

And so we put -- would have put $60 million in funded, but we know -- in fact, we hope on that program that it will eventually be larger than $1 billion.

And so -- and by the way, we're always happy to talk about that to help you, give you insight as to what's in the funded part versus the unfunded.

But -- and that's why you see us emphasize the total number rather than just the funded.

That's really helpful.

If I could just sneak one more in, on free cash.

Jim, I was hoping you might be able to tell me for each of kind of the major movers in working capital, which I would think are inventory, accounts receivable and accounts payable, for each of those, are they a source of cash or a use of cash in your free cash flow guidance for the year?

In free cash flow guidance, I'll start with accounts payable.

That will become a source of cash.

The number for accounts receivable will become a source of cash.

And then for inventory, it should be fairly neutral.

It is -- that's a little bit harder to predict, mainly because of the inventory that today I know we're buying for a major customer program that's outside of the United States, and these relate to spare parts and those kinds of things.

And where those inventory balances really are more dictated by the customer than by my ability to forecast it.

Have you been able to kind of level load or reset yourself on where you think long-term DSOs should go?

Yes.

I mean, our goal is to -- now that we are on for 90-plus-percent of the business on one accounting and billing system to be able to use that to leverage some more consistent processes to drive more ambitious DSO goals into the third and fourth quarter of this year and even beyond.

And in my view, ambitious is in the low 60s or high 50s.

And today, when we tell you that we're at 71 at the end of the first quarter, I am absolutely certain that, that number is there simply because we've had some anticipated disruption from moving to that single system that we want to run the business on.

Our next question is from Krishna Sinha with Vertical Research Partners.

Just a follow up on that cash flow question.

Can you size -- I don't know if I missed this in the remarks, but can you size the amount that you got in advanced payment in the first quarter?

And then also, what was the incremental build in the working capital from the transition of the billing systems?

Well, we didn't guide anything in -- we don't guide cash flow by quarter.

We guide it by year.

I would tell you that it was roughly $130 million of cash that came in, in advance of when we expected internally, which drove the first quarter in several years of positive Q1 cash flow.

If you go back and look at our history, Q1 is typically a negative cash flow quarter, primarily because of a lot of front-loaded benefit payments and bonus payments that occur once a year, et cetera; plus the fact that, historically, our customers tend to accelerate payments at the very end of the calendar year.

We had a good -- a remarkably good cash flow quarter, driven mostly by those advanced payments.

Through Q2, Q3, Q4, we should start to harvest the benefits of improved billing processes and billing systems and end up at roughly -- I would be disappointed if we didn't drive DSO well under, say, 68 days by the end of the year.

Okay.

And then on GENESIS, one, what's your expectation on installations for the rest of the year?

And then, two, if I just look at GENESIS overall through the 2022 period, it seems like the growth on that is enough to push your complete growth or your company growth above the 3% range or the 3% CAGR that you've guided to.

So I'm just trying to get a sense for if there are other moving pieces besides GENESIS that would be a big headwind that would push you down to the 3% bogey.

Krishna, let me talk a little bit about the GENESIS program, and I'll let Jim maybe follow up with some of the numbers.

So we are fully deployed at the IOC sites, which we did essentially on time.

We are now, doing our lessons learned on those IOC sites, meeting with customers.

In fact, Jon Scholl and I were there just a couple of weeks ago and meeting with the commander at Madigan about what went well and what lessons we need to learn for future deployments.

Our customer determines what we're going to do next.

And they are contemplating where we start the first wave, which we expect to happen this year, but we'll go through the process of installing it.

And when we actually hit full operational capability, whether that is an '18 event or '19 event, will depend upon which site they pick to go first and how fast we implement.

But very pleased with the program.

It's on track, fully supported by the customer.

And probably, the news in the quarter was the customer's decision in conjunction with the Coast Guard to add the Coast Guard to the program.

And so over the long-term period, the program is essentially a 10-year-plus program, that will increase the size of the program and the number of deployments that we have.

And not a huge increase in the program because we're just adding on another set of users, continues to solidify the importance of that program to our customer and to us.

Yes.

And just to pile on a little bit, Krishna.

The deployment decision and the pace of that, we should -- we're expecting to learn that, as Roger indicated, from the customer sometime, hopefully, late this quarter.

Our expectation for Q3 and Q4 that's kind of embedded in our Q1 results and our full year guidance, it does include, we think, a reasonable expectation on what that revenue uptick is going to be.

But just keep in mind, in the past, as we've said, the real peak of that ramp isn't going to occur until sometime in 2019, and it could be even the latter half of 2019.

Remember, full deployment of the system isn't expected to happen until 2022.

So the real acceleration, we're seeing in 2019.

Okay.

And then just, I guess, a follow-up on that.

The VA contracts, obviously, a lot of headlines on that.

But a part of the impetus for getting that signed was that it was going to generate some cost synergy for the customer to deploy them, to deploy GENESIS and the VA simultaneously.

If the VA continues to slip to the right, which it sounds like it's going to, does that then increase the amount of the eventual contract that they're going to have to spend because the customer won't get those synergies?

Well, first, it is likely that the VA will contract directly with Cerner.

And so it's not -- it's really not our program.

But we are fully supportive of the VA and Cerner, and we will do whatever we can to make that program successful and look forward to the opportunity.

Your specific question, I mean, if it takes a few more months, 6 months, to get it under contract, I don't think that's going to diminish the value of the VA's decision to purchase essentially the same system that we're deploying under the Defense Health Program.

And in fact, I would guess is it could actually extend months or maybe a year before you start to see any whitespace between the 2 programs.

And again, as we've always said, we will do everything we can directly with Cerner or the VA or things that we're contractually allowed to do under the Defense Health Program to make that program successful and to allow both agencies to reap the benefits of picking essentially the same electronic health care records system.

Our next question is from the line of Ed Caso with Wells Fargo.

I guess I'm trying to understand the comfort level within the revenue range.

I heard timing issues and so forth.

But presumably, some of that would have been known 3 months ago.

So has your confidence changed within where you might fall in the range relative to 3 months ago?

Give us some help on that front.

Thanks for your question, Ed.

We were aware 3 months ago that our Q1 revenue was going to have an element of it that pushes into the back end of the year.

But that has no impact on the guidance and how we thought about guidance for the full year because we guide on a full year, not on a quarterly basis.

So our reiterating our guidance today is really rooted in what we see in pending award decisions, what we see in what was a pretty strong book-to-bill in Q1 and particularly strong book-to-bill in the Defense segment where, as we've indicated, we've spent some time tweaking and changing our people and our processes in how we go about winning new work.

I think in the call last quarter, we indicated that we've seen gradually improving win rates, and that holds true even into the most recent quarter.

And when you combine gradually improving win rates with a larger pipeline and a larger throughput, it does give you that confidence in your forward growth outlook.

Just so I'm clear, so you're as comfortable as you were 3 months ago?

Yes, absolutely.

At least as comfortable.

Yes.

And Ed, anyway, thanks for joining us.

And I would reiterate that as well, especially in the macro world is -- where we were at the year-end, it would have been hard to predict that the omnibus and the sequester caps and that the macro environment would be as favorable as it has been.

And in our discussions, we've always talked about this year having a ramp to it.

And in any given quarter, as we have said in other quarters, there are always pluses and minuses.

And we got advanced payments from materials, but we can't book those materials.

Those materials will be booked as we pull them into inventory in the future quarters.

And so we feel very good about our guidance.

And Ed, as you know, we very rarely touch guidance in the first quarter.

It's just not what we do.

So we're confident with where we are, and looking forward to the next couple of quarters.

And my other question is on sort of the procurement officer behavior.

Given this enormous wall of decision-making and contract deployment they face, are they backing off on squeezing hard on pricing and margins?

Are you seeing any of that?

Or is it -- has that sort of intensity continued?

Let's see.

You always hate to generalize.

I mean, we have defense customers, intel customers, civil customers and then we've got a significant amount of our business which is international.

I think I would not change the characterization of the procurement professionals that we deal with.

They are trying to get value for their customers.

Even though they've seen increases, frankly, their mission has increased.

The world is a complicated and sometimes dangerous place, and they are trying to buy more with less, as they have for the past few years.

No, I wouldn't say that I have seen a change in their behavior at the negotiating table, whether it be on fees or payment profiles or things like that.

Our next question is from the line of Greg Konrad with Jefferies.

In the past, you've quantified a bid pipeline.

I'm sorry if I missed it, but any color around the current bid pipeline?

I'm sorry.

The question again, Greg?

In the past, you've talked about a bid pipeline of -- I think it's been $24 billion in the past.

Any update on kind of what you're seeing in terms of opportunities?

Yes.

As we book more work, we're adding back into the pipeline.

The pipeline is consistent with what we've seen before.

And in fact, the thing that we're liking about what we're seeing is that the average duration of the things that are both coming into the pipeline and coming out is longer.

In the past, it's been characterized a little bit more by extensions and bridge contracts.

And now the customers tend to be getting back more into a cadence of more multiyear awards than we have been seeing prior to the current quarter.

So again, that really speaks to the quality of what we're getting.

[I see.] And you mentioned the strong book-to-bill in Defense in the quarter and then starting to see the logjam clear since you had the omnibus funding bill.

I mean, have you seen a difference in behavior when we look at DOD and defense versus some of the civil agencies?

I mean, should we think that the civil agencies will pick up?

Or have both started to clear the logjam?

I don't want to over-characterize civil versus defense because you always have to go procurement professional (inaudible), procurement professional.

But if I would generalize for just a moment, I would say that the Pentagon has a more mature process for moving money quickly.

And for many agencies, especially those in civil, the omnibus -- results from the omnibus was a bit unplanned.

So from Secretary Shanahan, he was hoping for this.

He had done a lot of preplanning work, and so I think the Department of Defense and the intel agencies are going to spend faster.

Some of the civil agencies who look at the skinny budget with a decrease now end up with a surplus.

And so they had perhaps not as much advanced planning to spend that money quickly.

Also, they may not have the luxury, and again, it's program by program, to create sort of 2-year money out of 1-year money at the end of the year.

So I would expect spending in the Department of Defense to pick up faster if, again, if we had to generalize civil versus defense.

And then just last one from me.

I mean, last quarter, you called out lower volumes from the synergy savings and pass-through on cost plus.

I mean, was that part of the year-over-year comp?

When we just think about some of those synergies coming through a year ago, I mean, was that a headwind in Defense?

The amount of that headwind is not nearly the level it was a year ago, simply because the year-over-year run rate of cost synergies hasn't changed as much as it did a year ago this time.

Our next question is from the line of Joseph DeNardi with Stifel.

Jim, maybe if you could just help us which -- with which fiscal year you're seeing your current opportunities funded out of, just given some of the choppiness in the budget and the challenges in getting money on contract.

Can you just help us baseline what fiscal year your current business opportunities are being funded from, so we can get a sense for what sort of budget upside is still on the come?

Well, you know that the -- I think Roger alluded in answering the last question, that given the timing at which the omnibus was passed, there is -- a lot of our customers are going to have some flexibility on when to get the current FY '18 money on contract.

That will be helpful to us and really our peers.

So there will be a lot of it that's coming out of -- a lot of current year awards coming out of FY '18 money, obviously.

But I think that we're going to see a little bit greater tendency than we have in the past toward multiyear awards.

Obviously, there will be some follow-on work in this year's bookings.

It will be coming out of FY '19 and FY '20 money.

Okay.

And Roger, for you, I think there has been a little bit of chatter, particularly at the PSC conference, that the OMB may be throttling back some of the budget increases and not dispersing money to the agencies.

The OMB has said, just because it's budgeted, doesn't mean we need to spend it.

I think there are some questions as to the legality of that.

But can you just talk about whether you're seeing any impact from that?

Let's see.

First, we read the same trade journals that you do.

I can't tell you that at the program level, we actually can tell.

We have any real evidence that, that is happening.

And then on the legality of what OMB can do and what they can't do, I'm lucky enough to be able to read our financials, much less giving you an opinion on what OMB's authority is.

But listen, I think there's just huge requirements for us to modernize our infrastructure.

And this is a great opportunity for all the agencies to catch up on spending, which I believe the federal government underspent over the past 5 years.

And so I think in an environment like this, all OMB is trying to do is to make sure people spend the money in a smart way, and they buy things that are going to make a long-term difference.

And I think they're trying to be fiscally responsible and not buy a lot of spare parts that they don't actually need, simply to use up the budget authority.

But from our standpoint, I can't think of a program where we seem to be affected by kind of a funding allocation veto being done by OMB.

Our next question is from the line of Tobey Sommer with SunTrust Bank.

Can you quantify what you mean in your prepared remarks about the duration of contracts kind of reversing and starting to inch longer, and maybe give us a sense for how you see that in your submitted bids as well as the pipeline of opportunities you're looking at?

Yes.

Thanks for the question, Tobey.

In the past, a lot of the bids we were submitting and being awarded tended to be, particularly as it relates to on-contract growth, it tended to be extensions because a lot of our procurement authorities that we deal with, instead of doing 5-year awards, they weren't quite ready to do a major procurement, so they would give us an extension.

And typically, those can range from 6 months to 12 months.

And that was the significant weighing factor.

And even beyond that, because we are seeing and have been seeing an increasing use of IDIQ vehicles and GWACs, those typically are situations where a lot of task orders are single year, some of them are multiyear awards, but there had been a definite tendency towards shorter periods.

In the past quarter, though, we have been seeing the average duration go as much as, well, on average, almost 6 months longer than the awards we have been getting last year.

So that is actually helping to -- and we do this analysis regularly.

The average length of contracts that sit in backlog is now growing as opposed to shrinking, and that gives us better visibility into our revenue numbers for the year.

Great.

That's helpful.

And how does that improve visibility?

How does it translate into changes and the way that you look at the business?

Trying to look at what sort of financial implications that has for you, not only the 6 months that you commented on, but perhaps further increases in duration.

Well, the first place that it helps us, is in business development.

When contracts have longer duration, you're going back to the well less frequently, and you're actually able to spend in proposal dollars on things that you realize over a longer period of time.

So it makes for -- and by the way, it's also helpful for our customers.

So I think everyone benefits when the customer is able to think longer term in how it buys.

And that's what we're seeing in the RFPs that are coming out and the things that we're bidding on.

Next question is from the line of Jon Raviv, Citigroup.

Roger, you flagged that you had good margin in the quarter despite some of the lower volume.

So just how do we think about the interaction between growth and margin going through year-end?

Essentially, can margin improve with volume pickup?

Or is the mix going to kind of go against you through the rest of the year?

Yes.

Well -- and I think we've talked about this in prior quarters where we've talked about growth and new programs.

And Jon, I'm sure you've been on other calls in the quarter and seen some of our competitors who have had some significant growth.

But perhaps, that growth has come at -- to the extent -- or at the extent of margins.

It's typical in the lifecycle of a contract.

When we bid it, we don't know much about our performance.

We're more conservative.

We don't earn as much.

But then over time, our margin tends to increase.

And if we had major recompetes, which, fortunately, we don't really have a lot this year, but if we did, usually, what happens in that recompete is you bid at lower margin and then you perform.

You get your award fees up.

You're conservative in your bookings, but your margin increases over time.

We have guided to a margin number that obviously we feel very comfortable with.

Once again, I'm here talking to you all, saying I'm a little bit ahead on margin performance, which is a good thing, but we're not changing our guidance on margin performance for the year.

And we know we've got some growth to deliver, and so you'll have to conclude from that what you will.

But we're also not, if you will, lowering our margin performance.

And simply, we've reaffirmed the guidance that we have out there, which is we think we can maintain that 10.1% to 10.4% and still hit our overall revenue numbers.

Yes.

I'll add one thing onto that, Jon, and that is that when you think about achieving over $400 million of run rate cost synergies, what we've said previously is that even though there's a significant amount that we give back to our customers, of the piece that we keep, we're reinvesting a part of that in our ability to grow the business.

We're investing it in marketing and bid proposal activity, which has -- the amount of submits that we have this year has picked up, and we need more money to prosecute that work.

And that's also a part of how we're thinking about the current year.

But we're able to do that and maintain the margins that we're looking at.

The next question is from the line of Brian Ruttenbur with Drexel Hamilton.

Yes.

A couple, just quick housekeeping.

I know we got to wrap up.

Taxes for the rest of the year, you did 18% in the first quarter, and then just talk about how that's going to shake out for the rest of the year.

And then you just addressed this, but SG&A and gross margin, the mix is a little bit different than historical, and I know that things get in different buckets.

But we should be relatively consistent on that mix going forward, percentage-wise, like your gross margins were 14.6%, SG&A was 7.3% in the first quarter.

That rough mix going forward in buckets should be the same for the rest of the year?

Yes, I'll answer your, Brian, your last question first.

The mix should stay relatively the same.

One reason you see it as having changed from what it looked like last year is that effective January of this year, we did, in effect, a re-architecture of how we do our cost accounting in our government disclosure statements, and so we've re-bucketed some things.

And our practice is to display them in our press releases and 10-Qs, consistent with how we account for them with the government regulators.

Relative to taxes, you're speaking of the GAAP tax rate.

We normally think -- when we guide and talk about it, we talk about a non-GAAP tax rate on the things that exclude those intangible amortization and the cost of implementing our business combination plan.

The -- our view of the tax rate at roughly 22.5% hasn't changed.

We had a slightly lower-than-expected tax rate in Q1.

But for the full year, we're still looking at somewhere between 23% and 24%.

The next question is coming from the line of Cai Von Rumohr with Cowen.

While you kept your revenue estimate, if we look at the first quarter, beyond the $60 million of timing, it looked like there was a comparable shortfall in terms of revenues.

On the other hand, you talked about a better forward-look bookings environment.

Was your single-point revenue guess at the end -- or today, is it where it was when you first formulated guidance?

I'm not asking you to tell me what it is, but is it exactly the same?

Yes.

And Cai, what I would tell you is, to amplify on Roger's succinct answer, yes, there isn't anything different in how we think about the business.

What we've tried to give you some visibility on is what drove the deltas that were consistent with how we planned the year.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

I'd like to turn the call back to Kelly Freeman for closing remarks.

Thanks, Rob.

And thank you, everyone, for joining us this morning and for your interest in Leidos.

Have a great day.

This concludes today's conference.

Thank you for your participation.

You may now disconnect your lines at this time.