Leidos Holdings Inc (LDOS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Leidos' first-quarter 2015 earnings conference call.

(Operator Instructions) As a reminder, this conference call may be recorded.

At this time I would like to hand the conference over to Ms. Kelly Hernandez, Vice President of Investor Relations.

Ma'am, you may begin.

Thank you, Sayed, and good morning, everyone.

I would like to welcome you to our first-quarter calendar-year 2015 earnings conference call.

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

Today we will discuss our results for the quarter ending April 3, 2015.

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

Mark will follow with a discussion of our financial performance for the first quarter and our expectations for the future.

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

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

Due to the previously announced change in our fiscal year, we will be comparing our just-released Q1 calendar 2015 results for the quarter ended April 3, 2015, with our previously reported Q1 fiscal 2015 results, which represent the three months ending May 2, 2014.

During the call, we will also make forward-looking statements to assist you in understanding the Company and our expectations about future financial and operating performance.

These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks.

In addition, statements represent our views as of today.

Subsequent events and developments could cause our view to change.

We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

Finally, 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 supplemental information on our Investor Relations website.

With that I'll turn the call over to Roger Krone.

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

Before I begin, I'd like to spend a moment to thank our CFO, Mark Sopp, on what is likely his last earnings call with Leidos.

As you know, earlier this year Mark announced his intention to retire from Leidos, and we are in the final stages of selecting his successor.

Mark has been with the Company for nearly 10 years, and was involved in our initial public offering in 2006, and has been instrumental in growing the Company from roughly $7 billion a year in annual revenues to more than $11 billion annually before the spinoff.

We wish Mark success and happiness as he embarks on this new chapter in his life.

While we're on the topic of management changes, I am pleased to announce that we have successfully concluded the search for our Health and Engineering sector President.

This individual will be joining Leidos in the coming weeks, and we will be making an announcement regarding his appointment shortly.

On to the quarter.

This morning we announced our financial results for the first quarter of calendar-year 2015.

Revenues, earnings per share, and cash flow came in generally as expected, and we are tracking well to the annual guidance we provided on our last call.

Our book-to-bill, both on a consolidated basis and specifically in the National Security sector, is up from year-ago levels.

While this is a positive development, we recognize that there is still more progress to be made, and the true reflection of our BD improvements have yet to bear fruit in this metric.

We are making steady progress in our engagement with the United Kingdom Ministry of Defence, and in April we signed a contract for the logistics, commodities, and service transformation program, or LCST.

Mark will give you more details on this contract in his remarks.

Beyond this, a few other notable wins I'd like to highlight: a $7.2 billion multiple-award IDIQ contract by the US Army Intelligence and Security Command to provide global intelligence support services; $100 million multiple-award prime contract by the National Institutes of Health to provide professional information technology and technical services to the NIH Center for Information Technology; a $50 million single-award IDIQ prime contract from the Naval Facilities Engineering Command Atlantic to provide environmental planning and mission operations support for the U.S. Navy and Marine Corps aircraft.

We are also extremely proud of our federal health team for having won the AHLTA/CHCS sustainment contract, which was awarded to Leidos by the Defense Health Agency on April 30.

AHLTA/CHCS is the current electronic health records system supporting the DoD worldwide.

As a reminder, the original contract for CHCS was awarded to Leidos more than two decades ago, and we are deeply honored to have been chosen by the DoD DHA in successive competitive acquisitions over this period of time.

This award was the result of a highly competitive acquisition process spanning approximately 17 months.

Due to timing, we will book this into backlog in Q2.

We are pleased that the DoD continues to entrust us with sustainment responsibilities for this mission-critical system, having chosen Leidos as the best value solution.

Another highlight during the quarter relates to our security products business, which resides within our Health and Engineering sector.

Leidos is one of only three companies that has achieved certification by the TSA on its version 7.2 standard for its medium speed explosives detection system.

This new standard requires the inspection systems to be able to detect materials of considerably greater complexity and broader composition than in the past.

We are currently the only provider of reduced-size EDS systems to the TSA, but this most recent achievement will allow us to compete in a new market when the TSA upgrades their aging checked baggage systems.

Now to provide you with an update on portfolio shaping, the sale of our Plainfield Renewable Energy facility is progressing as expected, and we continue to believe the transaction with Greenleaf Power will close in the coming months.

There is more to go on portfolio shaping as we continue to evaluate our various businesses.

However, we have nothing further to report for now, and we will update you at the appropriate time.

Finally, on cash flow and capital deployment, during the first quarter we had a net use of cash for operating activities of $42 million, which was in line with our expectations.

We recognize the importance of deploying our excess cash.

Our first priority for capital deployment remains paying a dividend.

Beyond that, uses for cash are investing for future growth, managing our financial leverage consistent with being considered investment grade, and returning value to shareholders.

All of these options are evaluated every quarter with our Board.

Overall, I am pleased with the quarter and the progress we are making in expanding our served markets, improving our business development results, and focusing the Company on our core competencies.

Our priorities remain on our people, our innovation, and our cost; and I firmly believe we are on the right track in all of these areas, not just in the quarter we reported but in what lies ahead.

I would also like to take a moment to recognize our employees for their hard work and dedication to the Company and to our customers.

Leidos recently received two honors recognizing the culture that our employees have helped to create.

First, we were named as one of America's Best Employers for 2015 by Forbes Magazine; and second, we were named again this year as one of the best employers for veterans by Military Times for our continued commitment to veteran hiring and retention.

I want to thank all of our employees and our hiring managers for their instrumental part in earning these honors for the Company.

With that, let me hand the call over to Mark Sopp.

Thank you, Roger, and thanks, everyone for joining us.

(technical difficulty) $1.25 billion for the first quarter which represents a decline of 5% compared to the first quarter of last year.

The pace of revenue declines continued to moderate, now for the sixth sequential quarter.

Non-GAAP operating income in the first quarter of $80 million represents a margin of 6.4%, down slightly compared to the prior year.

As we'll discuss in the sector details, these results include the impact of some discrete expenses, most notably in facilities exit costs which we experienced in January 2015.

As a result of the fiscal year change, these discrete items are being reported twice: in this calendar first quarter and also in the fourth quarter of our last fiscal year ended January 30.

In total, these discrete items represented a 70 basis point dilution to our non-GAAP consolidated operating margin in calendar Q1, excluding which margins for the quarter would have been 7.1%.

Q1 margins were quite strong for our operating sectors, but were offset by higher than normative costs in the Corporate segment.

I'll cover more on this in a little bit.

Conversely, our effective tax rate during the first calendar quarter was below our normative rate, as expected, due to a combination of beneficial impacts recognized during January 2015, reported both in Q4 of last fiscal year and here again in Q1 of calendar 2015.

The more normative quarterly tax rate and what we expect for the rest of this year is approximately 37%.

Non-GAAP diluted earnings per share from continuing operations was $0.65, up from $0.59 in the prior year as detailed on slides 16 and 17 of the investor presentation on our website.

This was as expected and driven by lower net interest expense, a lower effective tax rate, and a lower share count from buybacks made in 2014.

Operating cash flow used from continuing operations was $42 million and generally in line with our expectations.

Receivables management was strong during the quarter, resulting in DSOs of 71 days, a five-day reduction year-over-year.

This was offset by a high concentration of annual payments, which typically occur in Q1, including annual bonuses and 401(k) contributions.

Further, during the first quarter we incurred a higher level of tax payments relative to our tax provision, which will largely reverse later in the year.

Shifting to business development results, consolidated net bookings totaled $891 million in the first quarter for a book-to-bill ratio of 0.72, slightly above the year-ago quarter.

We are encouraged by the recent wins and improvements we are making in our BD process; but as Roger said, we recognize it will take more time to see the full benefits of recent actions in our book-to-bill metrics, given the length of our 12- to 18-month sales pipeline.

We ended the quarter with $7.5 billion in total backlog, including $2.8 billion which was funded well more than six months of forward revenue coverage.

I will point out these book-to-bill and backlog numbers do not yet include any impact from the United Kingdom LCST contract; I will provide more detail on that contract in a few moments when I cover the National Security Solutions sector.

The value of bids outstanding at the end of the first quarter was $16.2 billion, up roughly 35% from Q1 of last year and roughly flat sequentially from Q4.

We expect this will decline noticeably once the LCST win shifts from outstanding bids to backlog.

Turning now to the select sector results for the first quarter, first in our National Security Solutions sector, NSS, revenues decreased year-over-year by $82 million or 9%.

70% of this decline was due to the continued reduction in US overseas award-related or Overseas Contingency Operations funded business, otherwise known as OCO.

This pace of the OCO decline is progressing as expected, and we continue to believe our OCO revenues will come in near $200 million for calendar 2015.

When adjusting for the OCO decline, our NSS revenues contracted approximately 3% during the quarter, primarily driven by the overall reductions in defense and US government spending outlays from prior-year budgets.

On to profitability.

Operating margins in our NSS sector decreased from 8.2% in Q1 of last year to 7.2% this quarter.

This decrease again reflects the effect of facilities exit costs discussed on our last call, which were incurred in January 2015.

Excluding this impact, NSS operating margins were 7.7% this quarter.

Before I move on to Health and Engineering, I do want to share some more details with you regarding the UK LCST contract.

As Roger mentioned upfront, we did sign the contract in April; however we still must meet certain conditions precedent in order for the program to become effective.

We expect those to be resolved in either Q2 or Q3 of this year.

Once these items are resolved, we expect to book into backlog in the upper $2 billion range in expected revenue contribution from this program over its 13-year term.

This figure reflects our expectation that we will net accounting on portions of the contract, meaning we do not expect to record revenue on the pass-through commodity purchases that we will be making on behalf of the Ministry of Defence.

Under that assumption, we expect the contract to generate revenues for Leidos of approximately $225 million per year on a typical run rate basis.

This approximate revenue run rate represents 5% of our trailing 12-month revenues, certainly a nice organic growth driver for the Company going forward.

We expect margins for this contract to start lower in the initial stage and ramp closer to the broader NSS operating margins over time.

This contract is structured as a gain share contract, which means there is a financial incentive for us to deliver ongoing cost reductions to the Ministry of Defence for the procurement and logistics solutions that we will deliver.

These dynamics represent margin upside opportunities over the long term.

And finally, please note this contract is denominated in pound sterling, and as such we will have some level of currency exchange risk in our operating results going forward.

As we develop greater visibility and precision on net cash flows related to this program, we will determine whether implementation of a currency hedging program is appropriate.

Now on to Health and Engineering, or HES.

HES revenues for Q1 calendar 2015 increased by $13 million or 3% year-over-year with growth driven by our Engineering business.

Q1 operating margins for the sector, as reflected on slide 6 of our earnings presentation on our website, include the impact of the previously disclosed $40 million Plainfield power plant impairment recorded in January 2015, as well as $6.4 million of operating losses from the plant during the quarter.

When adjusting for these elements, Q1 operating margins for the sector was 10.2%.

This represents a nearly 200 basis point increase from the prior-year period and is reflective of strong profitability performance of our security products business and the continued actions we have taken to rightsize the cost structure for other Health and Engineering elements, particularly on the commercial health side.

Due to the commercial and product aspects of our Health and Engineering sector, margins are more volatile and are significantly impacted by the timing of commercial health volumes and security product shipments.

Just an update on the latter.

As we have talked about for a few quarters now, we had a large security products order in the Middle East but had not shipped product nor reported revenue for various reasons.

We recently satisfied all necessary conditions required to commence shipment and are making our initial shipment to the customer this month.

Due to timing and contractual terms, we expect to recognize revenue from this shipment in Q3, rather than in Q2 as we originally had expected.

During the first quarter, our Corporate segment had a net cost of $17 million.

This is a bit higher than our normative rate, due to a combination of factors including facilities exit costs and legal costs which were incurred in January and also reflected in our Q4 fiscal 2015 results.

The more normative annual run rate we expect for the Corporate sector is in the $40 million to $45 million range.

Now moving on to guidance.

We are reiterating our guidance for calendar 2015 on all metrics.

We continue to expect revenues in the range of $4.6 billion to $5.0 billion; diluted earnings per share from continuing operations in the range of $2.20 to $2.45; and cash flow from operations at or above $200 million.

In conclusion, we are off to a good start in the year, and I am encouraged by the improved climate in our end markets and, most significantly, by the contributions of our employees to position Leidos and our customers for future success.

Before I conclude, I would like to take this opportunity to thank my colleagues and fellow gifted employees here at Leidos, and also the investment community and our shareholders, for all of your support in the near decade that I have been in this role.

The greatest experience I will take away is seeing firsthand the power and impact that our dedicated employees have had on our customers and also our nation.

That positive force allows me to depart with the utmost pride in our Company and confidence that Leidos is only at the beginning of great things to come.

With that, operator, let's now open it up for questions.

(Operator Instructions) Cai von Rumohr, Cowen and Company.

Yes, thank you very much; and, Mark, job well done.

A quick question on the LCST contract.

I think you said that you have a $30 million upfront cash flow need as you build inventory.

If you are starting out with margins a bit below the sector average, is it that basically it's going to take you three years to basically earn that back?

Or does that cash flow start to turn positive in the second year?

Thanks.

Cai, first, it's Mark; thank you for your earlier remark.

I would say that the $30 million includes both inventory and receivables, just to clarify that.

We have in our expectations a very favorable ROI for the program overall.

The working capital consumption in years two and beyond is very low and attractive for us, and so we do expect a reversal of course and positive cash flows.

Maybe not in the second year, but by the third or fourth we expect to be in positive territory.

Terrific.

Maybe you could give us an update on DHMSM?

Yes, hey, great, Cai.

Good morning; this is Roger.

Let me just bring you up to speed on where we are.

So DHMSM is the DHA electronic health records modernization program, and fairly complex program that has gone through several phases.

We have submitted -- actually I think yesterday -- what we would call our IPR, which is another milestone in the program.

So we had prior submittals; we had questions; we've met with the customer and done orals.

That has led us to updating our proposal and submittal of this thing called an IPR.

Now the customer will evaluate the IPR, give us scoring against our technical offering, and respond back.

That should happen I would say in weeks.

Then what will happen next is, with that, they will ask for the final price revision or best and final offer.

And we will go to final on the submittal, we think, 4 to 6 weeks from now with an award decision we think coming out in the July/August time frame.

So it's been a long road.

We think we see light at the end of the tunnel.

And, frankly, we are very pleased with where we find ourselves at this point.

Terrific.

One last one.

Commercial health, could you give us some updates?

I guess you said that the revenues were down.

How much were they down?

And basically is that business starting to show any signs of life on the order book?

In terms of year-over-year it was down double digits, Cai, but we see signs of stabilization.

We have new members of the team; Roger referred to one that's coming onboard shortly, but others there, and just came out of a very positive tradeshow experience with the team.

So it's good signals there.

On the other hand, it still remains to be a low visibility business, 60 to 90 days visibility.

And that's why we need to be cautious in our outlook and move very methodically in our steps to expand our offerings in the solutions and records exploitation phase, and revenue management and so forth, and build the team.

Terrific.

Thank you very much.

Edward Caso, Wells Fargo.

Hi, good morning.

Congrats to Mark.

Wondering if you are going to let your hair down now.

(laughter)

Given that we seem to be moving forward with a 2016 federal budget that wants to use the OCO mechanism rather than raise the base budget, how is that impacting your client decision-making, given that they are back to looking at short-term funding and not a long-term visibility?

Great question.

Of course, we're all watching what's going on down the street in Washington.

Although the Congress seems to be asking for more money, it's not clear that the President is going to give them everything that they are looking for; and it would appear this year as in past we may use OCO to make up the difference.

First -- and I would say I think we have all predicted this, so this is not a new behavior.

And to the extent it's affected customer behavior, that's a little bit baked into our projections already.

But if you want a general answer, the general answer is people tend to be delaying and procurements tend to move to the right.

However, I've been doing this a long time, and I could make that statement in both good times and bad: that nothing ever happens quite on the schedule that the procurement official would like.

But I'm a little bit more optimistic, frankly, this year than I might have been in prior years that we're getting more dialog between the Hill and the White House.

And frankly, with Ash Carter I think he is being a lot more proactive in spending time with the Hill and reaching out, trying to get the funding that he needs to run the Department of Defense.

Could you talk a little bit about pricing in the noncommodity part of your efforts?

Is it easing up?

Are the clients starting to pay for value, or is pricing still pretty tight across-the-board?

Well, let's start with probably the most apparent dialog, and that is, Frank Kendall and Better Buying Power 2.0 and 3.0 has clearly stated that he does not want to stretch his budget on the back of making this an attractive place for companies to compete.

So the dialog is there.

We have seen, I think, various program managers interpret that in different ways.

I think rather than see overall pressure on profitability we see different contract types.

So where we might have seen firm fixed price, we now see fixed-price incentive; where we would have seen more flexible pricing in development, we see more award fees.

I think again with [Chase], Dodd, and Frank, they are going to hold industry's feet to the fire.

But I think if you perform, you will be able to achieve margins at historical levels.

And we have done a great job of executing, and our historical levels have been pretty steady.

The Defense Department has been asking the contractors to step up and fund some R&D for them.

Where is Leidos (technical difficulty) in that view, their willingness to provide unfunded R&D?

Well, you know, there has been some complex discussions around R&D and IR&D recovery with the customer.

Let me answer your question first and then come back to some of the policy discussions that are going on.

First, we are going to spend more in R&D this year than we spent in last.

We are a technology-oriented Company and we think it's important to spend targeted IR&D -- frankly, CSR&D on the commercial side, and we actually have some pretty innovative programs we're running out of our corporate office to encourage innovation in the line.

We have some very entrepreneurial monies that we spend to do very far-out R&D.

The conversations we've had with DoD have been more around how does the Department optimize the spend of the entire industry.

If you've been a student of the industry for a long time -- and Ed, I know that you have -- they used to have a lot of oversight into how we spent our IR&D.

We have to write something called an IR&D recovery brochure, and we had to have a sponsor in the government, and they essentially proactively managed the industry spend.

We went from that to where whatever you could afford in your overhead you were allowed to spend, and there was much less oversight from DoD on our R&D.

I see the pendulum swinging back slightly to where Frank wants to optimize the amount of money that he spends industrywide that's in G&A.

We're not sure how that's going to manifest itself.

We're working with Frank directly and through industry organizations like AIA to make sure that's done in a thoughtful way.

And that is all embodied in his Better Buying Power 3.0.

Thank you and all the best, Mark.

Thank you, Ed.

Jon Raviv, Citi.

Hey, good morning.

A follow-up question on the UK contract.

You talked about $225 million, below-average margins.

When can we expect that to ramp?

Is that like we get a half year this year and then a full year next year, or believe it's slower or faster than that?

What I would like to do with that question and maybe to expand a little bit on what's going on in the UK is to introduce Lou Von Thaer, who is President of our National Security Solutions sector.

Lou and his team have been working for years on this terrific win for Leidos, and Lou is here with us.

I would ask Lou just to add some more color on what is going on in revenue and profitability, and a little bit about what we are going to do for the UK government.

Well, thank you, Roger; and, Jon, thanks for the question.

Let me start with a little bit on the contract itself, because it's a very interesting contract for us and it's one that we are extremely proud of our team, and extremely proud to be part of.

This contract will really transform the MOD's entire material stores management and distribution networks.

It's not the implementation of simply one system, or staff augmentation, or putting oil cans and tires on shelves; it's the beginning of an enterprisewide transformation for parts of the MOD.

The scope of the engagement encompasses information systems, business process optimization, streamlining and optimization of storage and distribution networks, enhancing and optimizing the demand planning and forecasting systems that the MOD will use for all their forward deployed services.

There is a lot of science to this, and we are very pleased that the customer has entrusted us to deliver the solution for them as we've done in past engagements with the US DoD and NATO.

Really proud of the team.

We've been working on this and we've had dozens of people from across the Company doing 14-hour days for the last couple years.

And to be fair, an MOD team has done the same level of work on this and the same level of dedication.

I think it's been a great partnership, where we are very happy to come through the competition.

It's impossible to ever recognize all the people that contribute to something like this, but I do want to call out a few of our key people that deserve some special notoriety.

Michael White, Scott Handley were our business development or business manager and contracts leads; Mitch Stevenson was our deputy of the contract; and Barb Doornink was our Senior Vice President and now our Managing Director who is actually staying in-country for the next several years to work this.

So this is a 13-year contract; three-year transition; 10-year operation after that.

And there is actually an option for an additional two years at the end of that potentially, if they decide to go to a recompete and go to next stages.

So if we look at how the contract starts up, this year we expect some nominal revenues.

We expect it to build relatively quickly next year into that $225 million, maybe even a little bit higher range that Mark spoke to.

And the margins we expect will start lower, but by the end of the transition we should be starting to approach -- so that three-year transition, we should be getting in the range of the typical earnings rates for the NSS sector as we look.

And as we look at this we already see the customer starting to talk about potential add-ons to the contract, so we will play those out over time as we get up and start to execute.

I think they are hoping to use this as a model for how other parts of MOD could take advantage of this contract and this actual application of systems.

So time will tell.

We have a lot of hard work to do, but the team is off and running very well.

As Mark mentioned, we signed the contract and we expect over hopefully this quarter, but certainly by third quarter, to have the final contract's precedence completed.

Those are actually in place, because the original intent was to award the contract before Christmas and then have it in place to operate.

When the award slipped out both sides wanted to make up as much time as possible to get the contract up and running as soon as possible.

So because of that, there's a few actions on both our side and the MOD side to complete a few of the contract actions, and those are well underway.

We don't see any of those as significant issues.

Great.

Thanks for that extensive answer.

Lou, while I have you, you talk about normative NSS or typical NSS margins.

What is that really, in your mind?

I know we're under pressure this year.

But is this a 7.5% business, an 8% business?

Have you ever thought about a number there?

Oh, I think about it all the time.

I think, as Mark said earlier, we've certainly seen some facility and other costs that have taken from that; but typically we're in the 8% range.

We've said that before.

I think when we pull out all the pieces we continue to operate around that range, and we really don't see anything in the portfolio that would change that substantially over the next few years.

Can you stay in 8%s even as LCST ramps?

Yes, I think so.

I think in the first year there won't be -- the sales probably won't have a material impact.

In the second year, again, around 8%.

We may see a few basis points up or down time to time, but I don't see a marginal change.

Thanks.

I'll get back in the queue.

(Operator Instructions) Bill Loomis, Stifel.

Hi, thank you; and good luck, Mark, with your next ventures.

Thank you very much, Bill.

Just looking at the margins on the commercial healthcare within Health and Engineering, what is that?

How much did the product sales boost margins to the adjusted 10%?

I'm just trying to get a sense of what that volatility might be with the product sales versus a sustainable commercial healthcare margin.

First, Bill, again thanks for the comment.

We don't like to give too much detail on the components of the sectors from a profitability perspective.

I would like to go back and expand on my remark on commercial health earlier.

While it did have meaningful revenue declines, I tip my hat to the team.

They are profitable in Q1 and a meaningful level; not up to the full margin level of the Company, but still respectable, and they've done a good job managing costs to achieve that.

I'll just reiterate that, as you know, when we have meaningful product deliveries out of our security products business, it is our highest-margin business in the Company.

And they've done a wonderful job for many years balancing their products and their maintenance streams to produce among the more attractive returns in that space.

We expect that to continue as they have meaningful volumes quarter to quarter, and that's why there is the type of volatility we saw in the first quarter being very strong.

Other quarters will depend on the security product shipment levels and the overall level of business across our commercial space, to include commercial Engineering and Health.

Just on the Middle East product sales that you expect to recognize in third quarter, is that a very high margin?

And given the size are we going to see an adjusted margin greater than 10% in the second half?

I'm not going to predict what our precise margin is going to be in the third quarter, but I think that because of the push there will be a little bit of stress in the second quarter from a margin perspective.

For the contribution that we will or hope to see from security products, that will be pushed to the right; so bear that in mind.

But for the same reason Q3 should be relatively strong, assuming that the revenue recognition does occur in that period of time.

Dealing with international shipments and installations and ultimate acceptance, there is some risk to that.

But that is our current estimate, is to hit that in Q3.

I would say that this particular order with this Middle East customer is at a profit level similar to the rest of our security products business.

Okay, great.

Then just a final question on the UK contract.

Can you talk a little bit about the labor transfer that have occurred or will occur?

Is there any restrictions on that?

Like do you have union agreements, or do you have flexibility on workforce adjustments, or are your hands tied?

If you could just go through that a little more.

Thanks.

Yes.

This is Lou again.

We have the TUPE process in the UK that regulates and determines how these items are happening, and the abilities that people have.

So we did a couple things.

One as we partnered with Kuehne + Nagel, a large logistics firm, a worldwide firm that has been a terrific partner on this.

What we have done is Leidos will take over some of these employees; Kuehne + Nagel will take over many of them who are doing a lot of the distribution, truck driving, forklifts, things like that.

And we will use what flexibilities we do have within the contract.

The MOD expects the size of the workforce to come down over time as we add efficiencies.

But by partnering with a large UK firm who has hundreds of job openings around the country for commercial versions of the same types of services, we believe the training programs we're putting in place and the flexibility they have with job openings will allow places for people to land as we add efficiencies to the contract, and also help the folks from the government side become trained in some commercial techniques in addition to the skills they already bring to the program.

So are you tied into some type of wage agreement or labor type -- similar type of union agreement, for example, like we have in -- like there might be in the US in some circumstances?

Yes.

I mean, there are the MOD or the government rules across the UK; and we are tied into those.

Those are all factored into the bid that we put forward.

And within those rules sets are where we plan to add the efficiencies that we will add over time.

Okay.

Then just be clear on pass-throughs and commodities, so you are not -- none of the equipment you're putting through is going to go through your revenues.

That is why the margin on this program you're talking about, once it ramps up, is going to be similar to the NSS normalized margins.

Is that correct?

It's just going to be more just direct labor?

Exactly.

That's our plan.

And as Mark stated, we plan to use net accounting; and to the ability that we are able to do that, that's exactly how we will book the program.

Okay, thank you.

Michael French, Drexel Hamilton.

Thank you.

Good morning, everyone.

Roger, you did mention on your portfolio shaping that you haven't made any decisions.

The question would be, if you could please add a little color on the factors that are being evaluated and what we might anticipate in terms of the timing of any decisions.

Yes.

It's not a very exciting process.

We are thinking about who the best natural owner is for the businesses that we have, in light of where we want to go from a strategy standpoint.

It became clear that Plainfield, that we were not the best natural owner for a renewable power plant.

And that was not a difficult decision for the team nine months ago or so.

CloudShield ended up in the same mode, a very hardware-driven product that we didn't think aligned with where we wanted to go.

I don't want to overstate the work that we are doing; we just want to make sure that we have a consistent strategy and the businesses that we have in our portfolio align with that strategy.

Okay.

I suppose the flip side on the portfolio shaping would be potential acquisitions.

As I am sure you are very well aware, the marketplace has been heating up in this space recently.

Wondering what your thoughts are on possibility of perhaps an acquisition.

Yes, we've touched on this in prior calls, so let me just reiterate our thinking and our process.

But first, obviously we do recognize that there has been a considerable amount of activity in the mid-tier space and in the services sector.

The deals that have happened, I think everyone has taken a look at.

One would draw from that that we have as well; and we are not disappointed that those deals went to another company.

Again, we are being very careful about our strategy and where we want to position the Company.

We clearly have the ability to play in the marketplace.

We have a group and a pipeline, and we are looking at all of these opportunities.

But as I said in the past, I think we are being very thoughtful about where we're going to deploy our capital.

It would have to be a business that created considerable cross-linkages into our business and the pricing would have to be right.

Now is not a time for us to lose our discipline, given that we have an enviable balance sheet position.

Okay, very well.

Finally, I would just like to conclude my questions by just offering a comment.

Mark, I would like to thank you for all your help and extend my best wishes for you in your future endeavors.

Thanks again.

Thank you, Michael, very much.

Jason Kupferberg, Jefferies.

Hi, this is Amit Singh for Jason.

Just quickly on the guidance, now that one quarter for the year is behind us and there are still a couple of moving parts in the whole year.

So I just wanted to get a sense of, as you've provided or reiterated your guidance, how much visibility do you have towards the lower end of the revenue guidance right now?

Let's see.

Let me make sure I understand the question.

I think your question was: how much visibility do we have towards the lower end of our guidance?

Yes, revenue guidance.

Yes, I am sure as you heard Mark reaffirm the guidance that we had out at the beginning of the year, s our revenue guidance is $4.6 billion to $5.0 billion, and I think what you're asking is: how do we feel about our risk and opportunities, given the guidance that we have out there?

I'll make a statement and I'll turn it over to Mark.

Clearly, we've reaffirmed our guidance based upon the visibility that we have in the year, given that we just closed the first quarter.

So we must feel pretty comfortable with the balance between our risk and opportunities and the guidance that we have outstanding.

Mark, if you want to add any color.

Amit, I'll just say that we have some upside opportunities and we have some risks.

But we think on balance, even given a fair share of each of those, we can be in our range and comfortably in our range.

So I would say we have good visibility and confidence clearly on the lower end and above that.

We're coming out of a strong quarter; we do have some security products that are back-end waited; some of those international.

Those represent some degree of risk, although we have a great team there.

We mentioned the visibility issues on our commercial health, yet confidence in the new team we have there.

And then we have Plainfield, which we do expect to sell; we factor that in for half of the year with operating losses.

If that shifts to the right then that could apply a little bit of pressure there.

And I would say a major upside is getting LCST off the ground -- not to the guidance but to offset those possible risks to balance things out.

So we think we have a strong portfolio and we're off to a good start, so we are confident we will hit the expectation.

All right, perfect.

Then in the prepared remarks you spoke about dividends being your top priority for capital deployment; and then you just talked about your M&A strategy.

Where does share buyback fall into all of this?

And what is your thinking about share buyback or any accelerated share buyback in near-term as (technical difficulty) if you're looking for (technical difficulty) opportunity or strong cash flow?

Right.

Well, okay, so share buybacks is a tool that we've used in the past.

We still have about 8 million shares authorized by the Board.

It is in that category of returning value to the shareholders, and it's something that we consider every quarter as we think about our cash deployment.

Okay, thank you.

Thank you.

I am showing no further questions at this time.

I would like to hand the conference back over to management for closing remarks.

Okay.

Thank you all so much for joining us today on the call.

Thank you for your interest in the Company.

We look forward to updating you again next quarter.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes our program.

You may all disconnect.