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Perspecta Inc.  (NYSE:PRSP)
Q2 2019 Earnings Conference Call
Nov. 14, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Perspecta Second Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Stuart Davis, Vice President of Investor Relations and Strategy. Please go ahead.

Stuart Davis -- Vice President of Investor Relations and Strategy

Thank you. Welcome, everyone to today's quarterly earnings conference call, our second as a public company. Mac Curtis, our CEO; and John Kavanaugh, our CFO, are here to discuss our financial results, business momentum, and forward outlook. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and financial presentation slides that we'll use for today's call.

Turning to slide 2 of the presentation, please note that during this call, we'll make forward-looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results. For a full discussion of these risks and uncertainties, please refer to our SEC filings, including our Form 10-K for fiscal 2018. In addition, the statements represent our views as of today, and subsequent events may cause our views to change. Though we may elect to update the forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

Finally, as shown on slide 3, we'll discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide deck for today's call includes reconciliations to the most closely comparable GAAP measures.

At this time, it's my pleasure to turn the call over to Mac who will begin on slide 4.

Mac Curtis -- President and Chief Executive Officer

Thank you, Stuart. Thank you all for joining us on this afternoon's call. On behalf of the entire Perspecta team, I'm pleased to report that our second quarter showed strong operational performance across the board.

Like I did on the Q1 earnings call, I'll focus on a few key messages. Now recently John and I spent some time on the road with investors and the meetings confirmed that these four messages are of keen interest to the investment community.

First, our financial results from the second quarter demonstrate that our financial model is intact and leading toward the upper end of our previous guidance. Second integration has been a major focus and we are on plan. Third, the engine recompete is on track. We signed two sole source extensions and we look forward to winning the new contract. And fourth, we are already seeing revenue synergies from the merger, as our innovation engine and patent portfolio differentiate us in the market.

Now let me dig a little deeper on each of these messages. First, our financial performance is tracking well to our model. From top to bottom, our financial results again exceeded our expectations. Revenue was up 1% year-over-year and up 3% sequentially on a pro forma basis. With industry leading adjusted EBITDA margins of 16.5%, adjusted EBITDA was up 9% and adjusted diluted EPS was up 2% year-over-year. And again our collections were excellent with adjusted free cash flow of $105 million, 142% of adjusted net income.

Bookings were strong as well with the book-to-bill ratio of 2.3 times and a healthy mix of new business. As a result of our strong performance through the first half of the year and our positive outlook for the remainder of the year, we are upwardly revising fiscal year 2019 guidance for all metrics, as John will describe later. Now second integration is proceeding well. We're making good progress on all fronts. We're about two quarters in and we're generally ahead of where we thought we would be. Integration is hard work, but we've got a couple of key factors working in our favor. Number one, the value proposition makes sense to our customers and to our employees. And number two, we developed detailed integration plans for seven months prior to close that prepared us to execute.

Our financial and business development results are indicators of success, but let me provide a little more color. The most important aspect of integration success is the people side and we're making great progress. We're doing the heavy lifting necessary to create a culture and build the workforce that will define a unified Perspecta. We've established incentive programs including short-term, long-term and for business development that will reward great performance and create a compelling retention incentive for top performance. Overall, the incentive programs are selective but it is designed to reach more of our employee population as compared to similar programs for our peers. This is consistent with our outcome driven performance-based culture. The programs have been well received by our people and should lead to better-recruiting, retention and more important results.

Short-term incentives will be delivering cash based on performance against revenue and adjusted EBIT goals. Long-term incentives for the leadership team will be delivered primarily and performance stock units based on performance against three year adjusted diluted EPS and adjusted free cash flow goals. Our incentives are clearly aligned with shareholder interests.

Later this month, we'll have our first open enrollment that establishes competitive and comprehensive benefit plans that support talent retention and attraction and to meet cost objectives. This new benefit program marks another important step in making Perspecta a top talent destination.

The results to-date on the talent front encouraging have been. Headcount is growing and attrition is normalized. We ended the quarter of approximately 14,500 employees. And culture, machine focus and core values make Perspecta an attractive employer and expect to sustain positive employee trends over time.

In other areas we remain on track to realize the $43 million of cost synergies and $20 million of delivery savings cost in fiscal 2019 that we committed to as part of the integration plan. We're making good progress on rationalizing our real estate footprint and we're aggressively working plans to consolidate our back office systems. Now third, NGEN is about where we said it would be going back to the May Investor Day. Since the August call, we have signed two sole source extensions to take us through May of 2020. Importantly, the funding across the contracts is relatively consistent with our current run rate, which means that we can continue to execute without interruption and our customers can continue to move the network and their mission forward. As we indicated at our Investor Day, the recompete or NGEN-R will grow in scope compared to NGEN and we split the two separate procurements. One for end-user hardware known as EUH, and the other for Services Management Integration and Transport known as SMITH. Requests for proposals are now out for both EUH and SMITH and proposals are currently due December 5 and January 10 respectively.

Now we respect our competition on this program, but we are excited about the recompete. A move to best value will enable us to accelerate the modernization and transformation of the Navy and Marine Corps network and provide greater impact to our customers. I've spent much of the last several months, meeting with our customers throughout the Navy and Marine Corps and I'm convinced that they recognize the numerous contributions of our team over the last two decades, but more importantly, they see the value of Perspecta's rich IP, innovation portfolio, agility advanced networking security and cloud capability as they look toward to the future.

And fourth, the revenue synergies that we expect it to begin to show most obviously in the strong bookings results for the quarter. Bookings totaled $2.4 billion in the second quarter representing a book to bill ratio of 2.3 times. Year-to-date book-to-bill is 1.8 times. Of the second quarter bookings $643 million or 27% was new business. As a result, Perspecta's backlog of signed business orders at the end of the second quarter of fiscal year '19 was $10.2 billion, which was up 13% compared to the first quarter of fiscal 2019.

Funded backlog at the end of the quarter was $2 billion, an increase of 1% sequentially. The largest award in the second quarter was a one-year, $787 million NGEN extension. The additional eight-month extension will be a Q3 award. In addition, we had a major expansion on our applications and infrastructure support contract with the Defense Manpower Data Center. About 30% of the $564 million DMDC award will be for new work. On the last call, I told you about the new technical support services, indefinite delivery, indefinite quantity contract with U.S. Postal Service. And this quarter we were able to transition all of our existing work in this area over to that vehicle and we've also begun to win some new work in security and application development monetization. So the forward outlook for bookings remains strong. We have robust pipeline of $68 billion in qualified opportunities over three years, including $8 billion of proposals already submitted in a waiting decision.

The vast majority of our pipeline represents new business and growth opportunity for Perspecta. Now one of the drivers of capturing this new work will be the innovation from Perspecta Labs and that's centrifuge keeps on spinning, especially in their area of cyber and network security. Two recent awards from the Defense Advanced Research Project Agency or DARPA illustrate the type of work we're doing. On the first, in support of the configuration security, our concept program, we're developing technologies that automatically generate, deploy and enforce configurations of components in subsystems for use in military platforms. The configurations must deliver needed functionality and performance while addressing system vulnerabilities and minimizing attack services. The technology has clear applicability to critical infrastructure and network connected systems for the Internet of Things.

On the second, we are supporting the cyber hunting scale or chase program. The goal of chance is to develop dynamic real-time tools that can successfully defend large-scale distributed network from broad spectrum cyber attacks.

Perspecta Labs will design and develop a set of components for threat detection and characterization that will accelerate the hunt process by translating a high-level threat description into possible concrete implementations using a variety of sophisticated analytic techniques, including adversarial planning, genetic perturbations and data-driven evaluation.

In summary, our end markets are growing and our innovation and intellectual property differentiates us from our competitors. Our entire team has worked hard to stand up a new company without missing a beat on delivering mission success for our customers. With each passing day, we are executing more efficiently coming together more closely and creating a stronger, more unified company that we can only proud of.

Now, John will go through the financials in detail and provide our forward outlook.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thanks, Mac, and good afternoon everyone. I'm extremely pleased with our second quarter results. Our entire Company across both business and functional groups has risen to the challenges of the market and the complexities of integration and performed at an exceptionally high level. We acted with urgency, discipline and purpose, which I believe are true hallmarks of Perspecta.

Now I'll go through the key financial results and drivers beginning on slide 5. In Q2, we had a full quarter of contribution from all three legacy companies. For sequential and year-over-year comparison periods, I'll refer to pro forma results, which assume the spin-off and mergers occurred at the beginning of fiscal year 2018. For current and past periods, I'll also exclude costs directly associated with either the spin-merger transactions or the ongoing integration process. We believe these pro forma and adjusted results provide an important baseline for comparing performance across periods. Our press release and presentation slides provide the reconciliations from pro forma adjusted results to GAAP.

Revenue for the quarter was $1.07 billion, up 1% from the second quarter of fiscal year 2018, and up 3% from the first quarter of fiscal year 2019. This growth was driven through our Defense and Intelligence segment, which increased 8% year-over-year with strong performance in our intelligence community and federal background investigations support businesses. During the quarter, we successfully completed a large classified, fixed price contract earlier than originally anticipated, which resulted in a $13 million revenue pull-forward from Q3.

Civilian and Health Care revenue decreased $40 million or 10% year-over-year. $38 million of the revenue decrease was due to the successful completion in December 2017 the large engineering support contract for the Kennedy Space Center.

Q2 adjusted EBITDA was $177 million, which was up 9% compared to year-ago pro forma adjusted EBITDA, as margin improved from 15.4% to 16.5%. Excluding the gain from the contract divestiture in Q1, adjusted EBITDA margin was steady quarter-over-quarter, and right in the middle of our forecast range of 16% to 17%. Strong adjusted EBITDA performance is the result of disciplined execution. We are on track to meet all of the commitments around merger cost synergies and operational efficiencies. We obsess on our cost text, we live within our cost envelopes, and we're committed to being one of the most efficient government service providers.

Contract mix is a primary driver of our industry-leading adjusted EBITDA margin. In the second quarter, our mix moved sharply toward an even richer blend of fixed price work. As a percentage of total revenue, our contracts were 57% fixed price, 20% time and materials, and 23% cost-plus. This quarter's mix was helped slightly by the revenue pull forward on a fixed price program that I just mentioned, but we expect that over the long term contract mix will continue to move in the direction of fixed price.

Depreciation and amortization totaled $74 million in Q2. Included in the D&A is $36 million of acquisition-related intangibles, amortization which is backed out of adjusted net income and adjusted diluted EPS. We also incurred $26 million of transaction, integration, and restructuring expense which is excluded from all adjusted metrics. Most of the $2 million of restructuring expense is reimbursed by the government.

Interest expense totaled $37 million in Q2, which includes the interest on our term loans and capital leases. At the end of the quarter, about 60% of our debt was fixed. Since then, we have executed additional swaps to lower interest rate risk. Interest expense should be fairly steady for the remainder of the year for fiscal year 2019 total between $140 million and $145 million.

To calculate adjusted earnings we applied our expected long-term effective tax rate of 27%. This resulted in Q2 adjusted net income of $74 million or $0.45 per share against a diluted share count of 166 million.

Adjusted diluted earnings per share for the quarter were up 2% year-over-year and also up 2% on a sequential basis after controlling for Q1 divestiture gain. Adjusted diluted earnings per share were less than adjusted EBITDA, primarily because of the timing of capital lease conversions, phasing out of purchase price accounting, and remapping of corporate assets as a stand-alone company. These factors increased depreciation and amortization, excluding acquisition related intangibles, amortization by $21 million.

Turning to slide 6. During the second quarter, we generated $76 million of cash flow from operating activities and $105 million of adjusted free cash flow or 142% of adjusted net income. Looking at the quarter, the primary difference between the cash metrics was $46 million of capital expenditures, which includes capital lease payments. A relatively high capital intensity is consistent with our high mix of managed, services enterprise, IT delivery, and these assets can lead to higher adjusted EBITDA margins and stickiness with our customers.

Working capital management performance was very strong across the board. Days sales outstanding for the quarter, excluding any benefits from the account receivables factoring program were 55 days, a sequential improvement of two days. We are operating within our target DSO range of the mid-to-high 50s.

As you recall, we were prohibited from repurchasing shares in Q1. This quarter, we were able to execute our balanced capital deployment plan with a mix of debt paydown, share repurchases, and dividends. During the second quarter, we paid down $50 million in debt, returned $31 million to shareholders, $8 million in quarterly dividends, and $23 million in share repurchases. The share repurchase figure includes $2 million for purchases in the quarter that were not settled until after the end of the quarter, and so are not reflected in our second quarter statement of cash flows. In all, we repurchased 923,000 shares.

We ended the quarter with $126 million of cash, $301 million of capital leases, and $2.5 billion of term loan debt. With $600 million of undrawn revolver capacity, our $726 million of total liquidity affords us substantial financial flexibility to manage the business.

Turning to our forward guidance on slide 7. We are revising our fiscal year 2019 guidance to reflect a strong first half of financial results and a positive forward outlook. We've taken out the bottom end of our previous revenue guidance and increased the midpoint by $25 million. We now expect pro forma revenue for the year to be $4.2 billion to $4.25 billion. Enabled in part by the $24 million gain from the contract divestiture in Q1, we now expect that pro forma adjusted EBITDA margin to be near the high end of a new range, 16.5% to 17% compared to our previous guidance of 16% to 17%. As a result, we now expect pro forma adjusted diluted earnings per share of $1.85 to $1.95, again taking out the bottom of our previous range of $1.80 to $1.95.

Finally, we are increasing our guidance for pro forma adjusted free cash flow conversion for fiscal year 2019 from 90% plus to 95% plus of pro forma adjusted net income. Of course, pro forma adjusted free cash flow will benefit from both the increased conversion rate and the increasing adjusted net income. The guidance is supported by our $10 billion backlog, the $8 billion of proposals already submitted and awaiting decision, of which $6 billion is new business, and the $643 million of new business won in the second quarter.

To provide a little more color, in the back half of the year, revenue should overcome the Q2 pull forward and remain fairly consistent with current levels in both segments. Similarly adjusted EBITDA margin should be relatively steady with segment margins coming into rough alignment. As for cash flow, we clearly had outstanding performance out of the gate. Year-to-date, we've generated $250 million of pro forma adjusted free cash flow, which is 152% of pro forma adjusted net income. The back half of the year will come down from that level of performance, especially in Q4. Based on the timing of tax and payroll outlays. The multiple fiscal year ends across Perspecta and the legacy companies create a lumpy tax payment schedule for fiscal year 2019. In fiscal year 2020 and beyond, cash generation should be more uniform throughout the year.

Finally, you will see a number of filings from us tonight. As usual, we'll have the press release, 8-K and our second quarter 10-Q. In addition, we'll put out an S-1 to register the shares for Veritas Capital as previously disclosed, because the S1 references the last 10-K, we're also putting out an 8-K that recast FY '18 into our two segments.

Operator, we are now ready to take any questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Edward Caso with Wells Fargo. Please go ahead.

Edward Caso -- Wells Fargo -- Analyst

Hey. Good evening. Congrats on another solid quarter here. Can you talk just a little bit about whether you feel comfortable that you've got enough margin flexibility to grow the Company as you had hoped? In other words, the promises out of the box, have they gotten you too constricted here on your ability to hit growth targets?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Hey. Hi, Ed, this is John. Thanks for the question. So, yeah, we feel good about this. Again, you saw the -- again strong Q2 performance. We are continuing to invest in the business, it's all about accelerating growth. So again, given how we've performed in Q2 in the first half of the year, we feel good and consequently have raised the lower end of the range, and again right now, expect to be at the high end of the EBITDA range.

Mac Curtis -- President and Chief Executive Officer

So, Ed, this is Mac. Just to add on to John. When we think about the operations of the business and the pipeline, I think when you look at it, 57% (ph) when you think about that, that was fixed price. The pipeline is certainly supporting that. It's in the 60%s, upper 60%s, and when we look at what we are looking at bidding now, so we are seeing the trend and more of the focus on kind of the firm fixed price. We've talked about that before. So, no, I think we feel comfortable where we are, not going to constrict the growth. In fact, we're starting to see more in the fixed price realm as we go forward looking at deals that we're going to bid on. So I think we have enough room.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

And as John likes to say this is absolutely not a cost play, but there are still some costs that we're delivering as part of our synergy savings and we're, as John said, keeping the margin relatively stable, which means we'll have a little bit more money to invest in the growth of the business.

Edward Caso -- Wells Fargo -- Analyst

Right. My other question is on staffing ability. Perspecta does a lot of high-end work, some highly skilled IT, cyber, so forth capabilities. Can you talk about the market as it is today, the competitive market for talent and maybe a little crystal ball on implications of the Amazon arrival?

Mac Curtis -- President and Chief Executive Officer

Yes. So, Ed, that's a good question. I think it's one of the reasons why we wanted to highlight in the call this afternoon what we're doing with incentive programs and benefit programs, because it is a competitive environment. We want to be a talent destination. We talk about in the business, the right rewards programs because if you have people, they want to come here, we talk about you don't have to lead to succeed. And so that's why we wanted to talk about that, and we've got some levers we can play with now. And it has to do with long-term incentive programs, short-term incentive programs. And again, I think we discussed and it's important to make sure we're lined up with investors and those requirements. But also to get the right people in the business that are willing to kind of better themselves. So that's why I wanted to spend some time to talk about that with regards to the talent that we look to acquire, that we look to hire. And I think we're having some success, but you have to stay after. On the announcement with Amazon, that does put stress on the system, it puts stress on 395 (ph). I mean it puts stress everywhere, when you think about eventually adding another 25,000 people back into crystal shape. So I think it does put stress on the system. And one thing I think is interesting is it's going to basically kind of push together the government customer and industry, I mean those that really understand, come understand the mission because it is about the right talent to be able to deliver on a mission. In the analysis, Ed, that we've done, roughly out of the 14,500 employees, just about 75% are not in with E&V. And so therefore, 25% is -- and out of that 25% for us, it's a pretty highly cleared workforce. Now it doesn't mean it's just not going to put stress on the system, it's another plan, we get that. So we're looking at how you wrestle with that, it's probably only time in my career, I've said, I'm glad I'm 30 miles outside of Crystal (inaudible). So, because that does -- the community does play a pretty big role within the worldwide balance. So again, stress on the system, but I think we have to be realistic about how we come back. The thing is, we really had this mission. Our employees get the mission but whether it's in a classified arena or wherever it is. So we just have to stay after -- stick to our knitting. We want to be a Company where employees want to come and stay and so we just have to get everyone run on it.

Edward Caso -- Wells Fargo -- Analyst

Great, thank you.

Mac Curtis -- President and Chief Executive Officer

Yes.

Operator

The next question comes from Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardi -- Stifel -- Analyst

Yes, good evening, everybody.

Mac Curtis -- President and Chief Executive Officer

Hi, Joe.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Hi, Joe.

Mac Curtis -- President and Chief Executive Officer

Mac, I guess when you gave your 3% to 5% revenue target that you were expecting growth in the budget in FY '20 and now maybe the expectation is that it's flat-to-down. Can you just talk about your confidence in your ability to achieve those targets given what seems like a less favorable budget outlook at this point?

Yes, Joe, certainly. Well, look I think we're a long way from the FY '20 budget. We'll see what happens. I think if we look at '19 almost there, three quarters of the bills are signed, a couple are still kind of hanging out there. You're waiting for ag and I think transportation that's basically (inaudible) couple that may be under kind of a CR. So I think we're a long way from getting 20 done. But a couple of comments, Joe. One, it's all about where you are in the market frankly, and because we look at the milt budget, the military intelligence, those budgets are going up. I think the R&D budgets are kind of going up. So I think where we are in the digital transformation, the cloud computing, the cybersecurity, when we talk about the intellectual property and what is generated out of the Vencore, all those are in good spots because regardless of the budget, it's still a dangerous world out there. And whether it's data analytics that are required, algorithm development to look for bad people, dealing with cybersecurity, those things don't go away. So I think the point is that we're in the right spot in the market when you think about where we are and digital transformation, cloud computing, cybersecurity, et cetera. I think the other thing particularly when you look at the DoD budget, Joe, I mean it was $716 billion this year, right. And if you're thinking about going to $733 billion to $700 billion we've talked about the Secretary Shanahan sort of put two budgets out, $733 billion and $700 billion. So if it is $700 billion, that's a 2% reduction from $716 billion. And so I think we'll see how it all comes out, that's still a lot of money in the areas that we need. The one thing I would say at least from what I've read and what I've heard, I think from the services, I think they're looking at it a little bit differently this time around. I don't think they're looking at kind of a peanut butter spread. I think the Department of Defense is looking to make decisions on platforms and they are going to sustain or not sustain, orphan (ph) systems that are going to retire. So, I don't think we are going to see whether it's 5% or whatever, 2% peanut butter spread that impacts R&D and operation and maintenance and shipbuilding conversion dollars. I think it's going to be really on specific systems. So again, I think in summary. We're in the right markets. I think we do the right functions in software and data analytics. $700 billion budget is still a lot compared to $716 billion budget this year. So we'll see, we're still very, very confident about our plan, what we projected in the future, for the next two or three years, the 3% to 5%. So we're sticking to our guns (inaudible).

Joseph DeNardi -- Stifel -- Analyst

So Mac, it's fair to say that even in a $700 billion budget that your addressable market would continue to grow that would be your expectation?

Mac Curtis -- President and Chief Executive Officer

That's correct.

Joseph DeNardi -- Stifel -- Analyst

Okay. And then you mentioned that the NGEN extension continues that work at the existing run rate. I'm just wondering if you could speak to your expectations for how that recompete is going to be split up and the relative size of the two pieces and whether you feel equally good about retaining both pieces or whether one is more likely than the other?

Mac Curtis -- President and Chief Executive Officer

Okay. Well, let me start at the top, and I go back to Joe, what we talked about at Investor Day and the thesis that we laid out is exactly what's happening. So the NGEN program that goes back to the EDS days, have done great work for the Navy for the last last two decades. They decided to come out with a procurement that they have to because it's a competitive environment. This is the big program and as we said in the Investor Day the NMCI program, NGEN-R is coming out into, they basically looked at and said, OK, we're going to take the hardware, the laptops and those kind of things. We're going to split that out and it's called EUH and user hardware that RFPs out on the street and I believe it's due December 5. Okay. So that's one part of the equation, Joe. The other is SMITH, which is really the systems management, it's the integration, it's the transport which is a big -- is a much larger opportunity. That RFP is out, and that goes in in January. So I think the way we've talked about this is, when you think about EUH coming out, again that's the hardware purchase et cetera, SMITH, in addition to what we do now there is additional work of putting in, there is a couple of the networks they have been looking at and some (technical difficulty). So the way we capture this is if you take EUH out, we think SMITH is going to be similar to size to the contract we're running now in the future and I'll kind of leave it at that. So, both are listed its best value, right. And I think that's a positive, that's different than what the contract was when it was bid in 2013. So that's positive. That allows us to make sure we can lean forward and provide the customer with the modernization and the technology need to operate the (inaudible) Internet. So I think that's the way it's kind of running. I am not going to give specific numbers Joe because it is in a competitive environment. But I think -- I think that I'll leave it at that, Joe. Does that answer your question?

Joseph DeNardi -- Stifel -- Analyst

Yes, that's very helpful. Thank you, Mac.

Mac Curtis -- President and Chief Executive Officer

Okay. Very good.

Operator

The next question comes from Lucy Guo with Cowen and Company. Please go ahead.

Lucy Guo -- Cowen and Company -- Analyst

Hi, everyone. Thanks for taking my questions. To start, not to delve on your long-term target, but given that you are updating some of the management comp metrics, just wanted to clarify are those in line or maybe a lot of them are ahead of your long-term target for investors?

Mac Curtis -- President and Chief Executive Officer

Well, I think the intent Lucy for the management comp is to be in -- certainly in line with the long-term plan. I mean that's the way we incentivize people and there are nuances that Jeff deals (ph). But I think the intent is management comp is consistent with what we tell investors so we can make sure that we can deliver and meet our commitments. So it should be in line. As you know, this can vary from year-to-year. This is the first time out of the box. We felt this was important because we wanted to incentivize people, we've taken a limit bit further down the organization because it is about building a company we're proud of. So the intent is to have it right in line with the commitments that we make into the Street.

Lucy Guo -- Cowen and Company -- Analyst

And I may have missed this, but are you also incentivizing for bookings or backlog metrics and/or in terms of the long-term total stock return -- shareholder return?

Mac Curtis -- President and Chief Executive Officer

Well -- OK, so I think the point is here, Lucy, that when you think about it, you got a short-term which is an annual bonus, you have a long term which is obviously long term. And what I did mention in the remarks is that there is also a business development program and that's focused on a little different metrics, but it all ties together. When you think about what is it you have to have, when you think about the periodicity of the contract which is the denominator, when you do the math it all has to try to make sure that we're meeting the commitments to the Street. So that's on a little different -- it's little different set but we landed up losing the business development incentive program, the long term, and all tied together because it has to, because -- and so again mostly if you think about bookings it's really important from a meeting perspective. So I think that's kind of the way we're thinking about it.

Lucy Guo -- Cowen and Company -- Analyst

That's helpful. On your second half bid pipeline, the submits that you're planning on, is that still $15 billion to $18 billion and that seems to include the (inaudible) in January?

Mac Curtis -- President and Chief Executive Officer

Yes, I think that's about -- yeah, we've got roughly -- we've got eight now and we're probably looking anywhere from $14 billion to $16 billion to $18 billion because we're not going to bid everything in the $60 billion pipeline and some things moved to the right which we don't control and so things change. But, yeah, it's about probably $15 billion to $18 billion is what we're looking at in the second half to submit, that's a good number, including NGEN.

Lucy Guo -- Cowen and Company -- Analyst

Got it. Maybe one for John and I'll turnover, which is your capital lease payments. The disclosure from the last Q, I haven't taken a look at the Q that just came out yet, but it seems to indicate from FY '19 to FY '20 there is about $80 million or so of tailwind to your free cash generation year-over-year. Is there anything that's offsetting that or are you just kind of being conservative on your free cash conversion targets?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

First off, again that's attributed to again, what we've talked about before the op to cap lease changes that was done last year. Again capital leases are more appropriate accounting treatment for the longer term nature of the work that we're doing in the refresh cycles. Okay. No, I guess, as I said in my prepared remarks, we're very, very pleased with the cash flow performance and some of the working capital management. But as I stated in the second half of the year, again we will see it coming down. There are, especially in Q4, tax payments and payroll outlays. So again, we've got a quarter under our belt. I think, again we've done the appropriate thing in raising guidance at this point, but at this point we're just going to continue to monitor and advise appropriately.

Lucy Guo -- Cowen and Company -- Analyst

Got it. Thank you. I'll get back in the queue.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thank you, Lucy.

Operator

(Operator Instruction) The next question comes from Krishna Sinha with Vertical Research Partners. Please go ahead.

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi, thank you. Just a little bit more color on your operating segment margins. The margins is sequentially on

a adjusted pro forma basis, especially in your civil and healthcare segment. But you also stated that in your prepared remarks, John, I believe you said that the margin was going to converge between the segments throughout the year. So, A, what was --I assume you with integration and restructuring expenses that affected the segment operating margin this quarter but when you say converge, converge around what sort of number are you thinking for the forward metrics?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Sure. Good question, Krish. So let me level set. So the sequential margin change, OK, is really what I would say the non-operational -- it was really to better align directly segment cost. More specifically for 30 days in Q1 costs were really aligned based on revenue percentage and now we have a much better direct relationship. So, therefore, what does it mean? Okay. So the margins that you see in Q2 are much more indicative, OK, of our operational performance and I think going forward in each one of those segments, there will be a good comparable on a sequential basis. So again I expect us to be right again in the defense intelligence in that 13%, low 13% range and in the civilian and healthcare again hovering around 13%.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. And then excluding the very chunky NGEN recompete in this quarter, what's your overall recompete win rate looking like now relative to sort of industry benchmark of 90%?

Mac Curtis -- President and Chief Executive Officer

It's above 90%, (inaudible) it's in low to mid-90%s is where (inaudible).

Krishna Sinha -- Vertical Research Partners -- Analyst

So then when you think about your forward, I think you said 27% new business wins, that's right at the sort of target that you were expecting. Are you seeing anything either on the upside or the downside on that new wins target? And do you need to do better than 25% to hit that top end of your revenue CAGR?

Mac Curtis -- President and Chief Executive Officer

Yes, I think the way we'd lay the model out is that between 25% and 30% because some of the deals are bigger than others as you would expect when you think about. So I think it will be 25% with 30% as kind of at the high end. I think 25% is the way we model it over the next three years when we said when we will be at the 3% to 5% is the way we've laid out those numbers.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

But to be clear, Krishna, when we talked about 27% that was 20% of the total were new business. Not that we won 27% of the new business bids we went after.

Mac Curtis -- President and Chief Executive Officer

So, again that's a good point, so on the book to bill $2.3 billion, roughly the $2.4 billion that was won, 27% was new business and I think that was (inaudible) was net new that runs out. Maybe I am confusing the issue, Krish.

Krishna Sinha -- Vertical Research Partners -- Analyst

Yes, OK, well then in that case what against the new business wins that you were targeting which is 25% in your investor presentation, what's the apple-for-apple comparison now to what you're winning?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

So let me level set Krishna. So relative to the revenue again we have raised the lower end of the range. So what I would say right now, you should be thinking about the go get to the new midpoint, right, based again on our strong Q2 bookings. We've got a little less than about 2%, OK. And most of that I think will come from recompetes or from our contract growth. When I look at the new business that's about less than half of that 2%-ish (ph) to get toward the midpoint. And again as I said in my prepared remarks, again based on performance in Q2, we are certainly expecting to be at the higher end of our revised revenue guidance.

Mac Curtis -- President and Chief Executive Officer

I think the answer to your question is simple, it's about 25% is what we model to be at the high-end in the 35% going forward. It's easy.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay, fair enough. And then one more quick question, you mentioned $13 million in revenue pull-forwards. What was the operating income impact of that $13 million pull-forward?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

It was fairly minimal, a lot of it was passed-through, so it was fairly immaterial.

Joseph DeNardi -- Stifel -- Analyst

Okay, thank you.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Stuart Davis for any closing remarks.

Stuart Davis -- Vice President of Investor Relations and Strategy

Operator, Gary, we really appreciate your assistance on today's call. Thank you, everyone, that was able to join the call. I'll be around after the call if people want to do some follow-ups. And we look forward to catching up with you guys out on the road.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 45 minutes

Call participants:

Stuart Davis -- Vice President of Investor Relations and Strategy

Mac Curtis -- President and Chief Executive Officer

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Edward Caso -- Wells Fargo -- Analyst

Joseph DeNardi -- Stifel -- Analyst

Lucy Guo -- Cowen and Company -- Analyst

Krishna Sinha -- Vertical Research Partners -- Analyst

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