Leidos Holdings Inc (LDOS 0.17%)
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Q4Â 2018 Earnings Conference Call
Feb. 19, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Greetings. And welcome to the Leidos' Fourth Quarter 2018 Conference Call. At this time, all participants are a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Hernandez, Investor Relations for Leidos. Please go ahead, Kelly.
Kelly Hernandez -- Senior Vice President of Investor Relations
Thank you, Kevin. And good morning, everyone. I'd like to welcome you to our fourth quarter and full-year 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 December 28, 2018. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company 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 discussion contains forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Finally, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in the press release that we issued this morning and is also available in the presentation slides.
The press release and presentation, as well as a 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 A. Krone -- Chairman & Chief Executive Officer
Thank you, Kelly. And thank you all for joining us this morning for our fourth quarter and full fiscal-year 2018 earnings conference call. 2018 was a continuation of our great execution and was a year of transition, as we pivoted the organization to focus on growth. We saw many successes and I am proud of our employees for driving these achievements.
The government shutdown had a negligible effect on our fourth quarter results and is expected to have an immaterial effect to our first quarter 2019 results as well.
Now, I'd like to start this morning by discussing four key highlights from our results -- bookings, growth, profitability and cash generation -- before focusing on what we see going forward in 2019 and beyond.
First, 2018 was a record year for us in bookings and backlog. We booked $13.7 billion in net awards into backlog, resulting in a 1.3 book-to-bill for the year and a record backlog of $20.8 billion. These bookings, along with other single-award IDIQ positions we won, will drive our growth this year and beyond.
The strong momentum in our business development results has continued into 2019 with NASA's recent award of the NASA End-User Services & Technology Program to Leidos. This is new work for us, a competitive takeaway, furthering our market share gains, although it is still subject to a protest. NEST is a single-award, firm fixed price, IDIQ contract with a potential value of $2.9 billion over 10 years.
Second, in terms of growth, the improving win rates and ramp of revenues from our new awards allowed us to close out the year on a strong note with year-over-year revenue growth in Q4 at the highest pace we've had in two years. For the third quarter in a row, revenues grew year-over-year as new awards increasingly contribute to the expansion of our base business.
Third, profitability was also a highlight for the year as we again exceeded our target of 10% or higher for long-term adjusted EBITDA margin and delivered margins of 10.4% for the year. We continue to balance margin and growth as we drive to our long-term targets in both areas, with revenue growth of 3% or more, while maintaining adjusted EBITDA margins at 10% or higher.
Finally, we continue to maximize the cash generated from the organization through the fourth quarter. For 2018, we generated more than three quarters of a billion dollars of operating cash flow, a 46% increase from the prior year's level, despite the revenue growth in the fourth quarter. Driving cash collections from the business is truly a cross-functional effort. These results show that our teams across the organization did a great job in driving cash conversion.
Throughout the year and continuing into the fourth quarter, we benefited from many initiatives to monetize our balance sheet. We will continue to explore additional such opportunities in 2019. Cash generation is important and smart deployment of that cash is essential to driving shareholder value.
In 2018, our performance allowed us to return over $600 million to our shareholders, or nearly 90% of our free cash flow through dividends and share repurchases. We returned $200 million to our shareholders through regular quarterly dividends and nearly $420 million in share repurchases, which allowed us to retire 6.5 million shares during the year.
We also repaid $59 million of debt. These actions are consistent with our stated capital deployment philosophy.
Now, we look forward to 2019 as we are focused on accelerating growth while continuing to execute our book of business. To drive this growth, we will leverage the strong defense budget and outlays, ramp ups from our new program wins and a strong pipeline of submitted bids waiting decisions.
We've entered the year with roughly $28 billion of bids outstanding. This pipeline includes several multi-billion dollar bids, such as our Department of Energy Hanford Mission Support Contract recompete, our DISA Global Solutions management operations program recompete, as well as the NASA NEST bid which I mentioned earlier.
We're also submitting proposals on several other large new business and takeaway bids during 2019 and expect decisions by many of these large programs during the year.
We've analyzed what's driven our improving win rates and our success in capturing new work. While it's clear that no single factor has led to this success, the three most prevalent areas are -- the strength of our technical solution, the competitiveness of our cost structure and our past performance credentials, all made possible by our talented and dedicated employees. Further, it's clear that customers have confidence in our ability to solve their large, complex problems because of our size, scale and depth.
We continue to strengthen across all of these areas including investing in our internal R&D, so we can offer increasingly advanced technical solutions. One particular area where we have seen strong customer enthusiasm is in the application of artificial intelligence and machine learning. These technologies drive efficiencies in our customers' mission through automation and also provide deep analytical insight at speed.
We also invest in AIML security to make all of our data-rich information technology offerings the most reliable and secure in the industry. Our AIML capabilities have already been instrumental to several recent program wins with our defense and intelligence customers.
With our anticipated growth, we'll need more people to join the company. I'm pleased to say we have seen improvement in our hiring statistics as our recruiting and HR teams had implemented innovative methods to improve our success and efficiency in hiring new employees, as well as improved retention rates of our existing employees.
We are also optimistic on the potential for a more efficient security clearance process, with a renewed focus on this effort by the Department of Defense, which recently assumed the function from the Office of Personnel Management. When in place, this increased efficiency will mean that our employees spend less time waiting to start work on classified programs. Refining the process is a complex undertaking that will take time to implement, but we are encouraged by the initial progress.
Now, we all continue to watch what is going on in the federal government. We are pleased with the last week's budget agreement that averts another shutdown. Even a partial shutdown impacts a broad array of vital government services that touch millions of Americans and impacts the important mission of our customers.
While there is still uncertainty on the debt ceiling limits and the sequester caps, we remain optimistic about the actual budgets that will be agreed upon and the spending priorities in government fiscal 2020 and beyond. As we analyze the budgetary activity beyond the headlines, we're encouraged that the government spending priorities align well with our strategy and our areas of technical strength, keeping us well positioned to drive growth.
Finally, I'm pleased to announce that we have set May 14 as the date of our Investor Day, which will be held in New York City as well as being webcast. The leadership team and I look forward to sharing our vision for the company and more details about our strategy at the event. I hope you will find time to join us.
With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our 2018 results and our 2019 outlook.
James Reagan -- Chief Financial Officer
Thank you, Roger. And thanks, everyone, for joining us today. We're pleased with our full-year 2018 results and I'll start by highlighting a few of our accomplishments for the fourth quarter and the full year.
Fourth quarter revenues increased 5.2% from the prior year and 2.8% sequentially, our third consecutive quarter of growth and another proof point in our growth trajectory.
In 2018, our adjusted EBITDA margins of 10.4% again exceeded our long-term target of 10% or higher. Fourth quarter margins were 9.7%, in line with our expectations and reflects typical seasonality in the margin profile, due to a higher proportion of materials revenues compared with other quarters.
This strong operational performance, coupled with lower-than-expected tax rate, drove a non-GAAP diluted EPS of $1.10 in the quarter. Non-GAAP diluted EPS for the year was $4.38, at the upper end of our guidance range.
Operating cash flows for the full year of $768 million increased 46% from the prior year and resulted in a 104% free cash flow conversion of non-GAAP net income, in line with our long-term goal. The slight miss versus our guidance target was driven by unexpected timing slips in the fourth quarter due to year-end payment system transitions at a couple of our key customers.
During the fourth quarter, we continued to monetize our balance sheet by selling our old headquarters building in San Diego for net proceeds of $79 million. The cash proceeds from this were received and recognized in two tranches -- $14 million in financing inflows in Q4 of '18 and $65 million in investing in flows that will be in Q1 of 2019.
In addition, just after the close of the year, we also closed on the sale of the old IS&GS headquarters in Gaithersburg for $31 million. Proceeds will be recognized as a cash flow from investing item during the first quarter of 2019. And these two transactions are an extension of our focus on monetizing non-core assets and increasing our return on invested capital.
Now, let me share some comments on our segment results. Revenues in the Defense Solutions segment increased 3.6% in the fourth quarter compared to the prior-year period, driving the third consecutive quarter of growth in the business. This growth largely reflects new program activity that expands our revenue base.
Non-GAAP operating margins in our Defense Solutions segment decreased 160 basis points from the prior-year quarter to 7.7%, reflecting a lower level of net profit write-ups. Now, as a reminder, there's typically a fair amount of variability in the quarterly timing of profit write-ups. For the full year, the segment's margins were 8.4%, flat with the prior year, reflecting a similar level of profit write-ups.
Awards activity was a highlight in the Defense Solutions segment. Net bookings were over $7 billion in 2018, a 56% increase from 2017. Book-to-bill for the year was 1.4, a substantial increase over the prior-year level of 0.9.
In our Civil segment, the new program wins and on-contract growth contributed notably to fourth-quarter results, driving revenue growth of 3.6% over the prior-year period. The start-up of new programs was the primary cause of the roughly 100 basis point decline in non-GAAP operating margins to 9.7%. Overall, we are pleased in the growth in this business and are confident in our ability to drive margins higher over time in this segment.
Bookings in our Civil business increased in the fourth quarter with roughly $1 billion in net bookings, which resulted in a 1.1 book-to-bill for the quarter and 1.0 for the year.
Turning now to our Health segment. Fourth quarter results were again very strong across all metrics -- revenue growth, margins and bookings. Revenue grew nearly 13% over the prior year and roughly 12% sequentially. This growth largely reflects the slippage of some revenues from the third quarter into the fourth quarter, as we discussed in our third quarter call.
Margins in our Health business expanded in tandem with the revenue growth. Non-GAAP operating income margins of 16.1% in the fourth quarter increased more than 400 basis points from the prior year and 190 basis points sequentially. For the full year, non-GAAP operating margins of 15.2% increased 30 basis points from the prior year. The margin expansion reflects a greater mix of on-contract growth in certain quick turn, fixed unit price contracts.
The Health segment also had a very strong year in awards activity, with full-year net bookings of $3.2 billion, roughly 75% higher than the prior-year level, resulting in a 1.7x book-to-bill for the year. During the fourth quarter, we booked $1.1 billion into backlog in the Health segment, resulting in a book to bill of 2.2.
Overall, all of our businesses demonstrated solid progress in the fourth quarter toward our growth targets and we expect all segments to grow in 2019.
But before I talk about 2019 guidance, I want to comment on the government shutdown and its impacts to our business. For fiscal year 2018, the shutdown was in effect for four working days at the very end of the year where we typically see heavy vacation usage, so there was minimal impact to our business.
The shutdown did, however, force the closure of the Committee on Foreign Investments in the United States, or CFIUS, which was the last approval needed to allow for the closure of our commercial cyber sale. We continue to work the process and we expect that deal to close within the first quarter of 2019.
For 2019, the shutdown impacts to our business are also relatively immaterial, but given the volume of questions we've received on this, I'll provide some context. First, we estimate our aggregate revenue impact resulting from the shutdown to be approximately $11 million. This effect is largely isolated to our Civil segment where some of our work for the FAA and the Department of Homeland Security were deemed nonessential, causing us to furlough some employees. We realize the effect that this had on those employees and it was not a step taken lightly. We may be able to recover some of this revenue loss throughout the year, but it is too early to estimate any recovery now.
The shutdown also caused some delays in the billing and collections cycle, as well as with award decisions, but these effects are more timing related and we don't expect any permanent impacts to our business from those delays.
Now on to our guidance for 2019. We expect revenue in the range of $10.5 billion to $10.9 billion, reflecting growth of 3% to 7% from 2018. We expect 2019 to be a year in which we will exceed our 3% long-term revenue target growth due to the strength of our backlog entering the year and our focus on driving on-contract growth and winning new business throughout the year.
Although we do not guide on a quarterly basis, I would like to provide some context on the quarterly phasing of revenues for the year and particularly for the first quarter. Similar to 2018, we expect revenues to build sequentially throughout the year starting from a low point in the first quarter.
Historically, Q1 revenues decline sequentially due to the lower level of material volumes compared to Q4. This year, however, we expect a greater sequential decline in the high single-digit range due to the combined effects of low materials buying in the first quarter, program transitions in our health segment and the shutdown.
From the first quarter low, however, we expect revenues to grow sequentially throughout the year and to drive to our full-year revenue guidance. We expect adjusted EBITDA margins of 9.9% to 10.1% for the year, a slight decrease compared to 2018. And as we've said in the past, there is a trade-off between margin and revenue growth and the ramp up of our new awards will drive slightly lower margin levels in the near term.
We expect non-GAAP EPS between $4.25 and $4.60.
We expect operating cash flow of at least $725 million, a slight increase from 2018 levels after adjusting for the interest rate swap monetization and the unusually low cash tax rate we experienced in 2018.
Following the fourth quarter sale of our San Diego building, we will move into the more material phase of our real estate consolidation activities in 2019. We will continue to streamline our footprint and reduce owned facilities, allowing us to work more efficiently and increase the level of collaboration across our functions. As a result of these actions, we expect a lot of moving parts to the different components of our cash flow statement this year. So, we've added a slide, slide 10, in our earnings deck which is available on our website to help you with some of the details.
Some of the real estate actions increased CapEx and, therefore, reduced the free cash flow metric, while others resulted in inflows in cash in investing and financing activities. At the end of the day, the net of all of our balance sheet monetization activities and our real estate investments will yield a positive cash inflow for the company and we will continue to deploy our excess cash from those transactions consistent with our stated capital deployment plan.
All that said, we expect 2019 capital expenditures of between $135 million and $140 million. Roughly $60 million of that is related to real estate investments and leasehold improvements, which will drive better asset utilization. As we've said earlier, between the San Diego and Gaithersburg real estate sales, we have already closed on transactions that will drive $95 million in inflows to cash from investing in the first quarter. These inflows will more than offset the one-time $60 million CapEx item that I referred to earlier.
Beyond leaning out our real estate portfolio, we will continue to look for opportunities to monetize the balance sheet, which increases our flexibility and drives value for our shareholders.
Now, a couple of other comments to help you with modeling 2019. We expect net interest expense between $135 million to $140 million and a non-GAAP tax rate between 23% and 24%.
To wrap up, we closed the year on strong footing. We generated over three quarters of $1 billion of cash from operations. Our margins were again over target for the second year in a row and we exited the year with a revenue growth rate of 5.2% and record backlog. We remain focused on continuing this momentum into 2019 by driving profitable growth and generating cash to drive long-term value.
With that, I'll turn the call over to Kevin, so we can take some questions.
Questions and Answers:
Operator
Thank you We'll now be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Cai von Rumohr from Cowen and Company. Your line is now live.
Cai von Rumohr -- Cowen and Company -- Analyst
Yes, thank you very much. Good quarter. Maybe you can help us understand, like what is in your guide for 2019? Does it include anything for NEST? Does it include the commercial cyber business that you hope to close? And then, maybe some color on the adjusted EBITDA margin, which looks like it's at the bottom of your expectations?
James Reagan -- Chief Financial Officer
Good morning, Cai. Thanks for joining us. Yeah. First, the guide does include our expectations for the ramp up of NASA NEST. The guide does not include the commercial cyber business. And in terms of our EBITDA margin expectations for the year, it reflects the fact that, in 2019, we've got a number of programs, the Army Corps of Engineers Program, NASA NEST, just to name a couple of them, where the ramp up of those programs typically has lower margins than for the life of the program, and we've been historically pretty conservative in setting those profit take-up levels early in the program as we plan on some contingencies.
As programs reach the end of their lives and we start to wind them down, that's typically when you get more liquidation of risk and we pick up some write-ups as you've seen us historically have in the past.
Cai von Rumohr -- Cowen and Company -- Analyst
Terrific. And then, for a last one, maybe update us on where you are with GENESIS?
Roger A. Krone -- Chairman & Chief Executive Officer
Great, Cai. I'll be happy to take that one. We're really pleased with the program. Our relationship with the customer, solid support in DHA for moving forward, a lot of enthusiasm over what's happened to the IOC sites and how we've learned from our initial deployments. We have agreement on a full schedule for deployments. We're currently working on, what we call, Wave 1. We've identified the different groups of hospitals we're going to deploy to. We expect Wave 1 to go live in the fall.
The next wave, not to confuse you, is actually going to be Wave 4 and we'll expect to start that later in the year. And then, we should be running a new wave about every six months. And at any one time, we will be in deployment of two waves concurrently. A lot of great discussions with our customers. We've got agreement on the go-forward plan. We should be fully deployed by 2025. And, Cai, as you know, the program is expected to extend to about -- excuse me, 2023 fully deployed and the program runs through 2025.
I know you've often asked in the past about sort of a ramp up in revenues and we expect to see that this year that maybe will give us sort of a point at the top line, something like that. And again, very enthusiastic about the program. A great relationship with our customer at DHA there. A strong commitment to put this technology in place, to increase the healthcare for our active military.
Cai von Rumohr -- Cowen and Company -- Analyst
Thank you very much.
Operator
Our next question is coming from Krishna Sinha from Vertical Research Partners. Your line is now live.
Krishna Sinha -- Vertical Research Partners -- Analyst
Hi. Thank you. On your operating cash flow guidance for the year, obviously, I see the slide about the real estate, but I'm just talking about the operating cash flow. Can you just give us some puts and takes there about what you're expecting, what's not being included or not recurring from 2018 to 2019 and just kind of what we can expect from the forward trajectory, maybe beyond 2019, in terms of cash flow for the business on an underlying basis?
James Reagan -- Chief Financial Officer
Sure, Krishna. Thanks for the question. The two big things that occurred in 2018, which are not recurring in 2019, and that's reflected in the go-forward guide, first, as part of monetizing the balance sheet, we took $60 million of cash for interest rate swaps that we could monetize in conjunction with extending the term of our term loan facility.
The second thing is, we had some opportunities to monetize some deferred tax assets. Now, these were tax assets that were fully reserved anyway. But that was $65 million of cash that we pulled in. That's also reflected in the GAAP effective tax rate of about 4.5%. So, those things aren't recurring, although we're always looking for opportunities to improve on our tax rate. So, those are the big things.
And then, there are also a couple of items and they are primarily program related. One of the large contracts that we just won will require us to buy some assets, and that's a roughly $40 million cash flow headwind that we will end up recouping over the life of the program.
Krishna Sinha -- Vertical Research Partners -- Analyst
That's great. Thank you.
James Reagan -- Chief Financial Officer
Sure.
Operator
Thank you. Our next question is coming from Robert Spingarn from Credit Suisse. Your line is now live.
Robert Spingarn -- Credit Suisse -- Analyst
Good morning.
Roger A. Krone -- Chairman & Chief Executive Officer
Good morning.
Robert Spingarn -- Credit Suisse -- Analyst
I wanted to ask a high-level question about the guidance from a segment perspective. In other words, how are you thinking about the growth across the segments? And then, the same for the margins. And this has to do with just some of the movement that we see in 2018, especially sequentially, with regard to margin. So, Jim, if you could give us some understanding, some color there by segment?
James Reagan -- Chief Financial Officer
Sure. Well, Rob, I'll remind you, we don't guide by segment. But what I can give you is some color on is, first of all, because we're expecting all of the segments to be growing with some fairly large program wins, as I mentioned when I was answering Cai's question, some of these larger programs tend to have margin profiles that ramp up as we increase the operating efficiency of these contracts.
We're probably expecting a little bit more growth in the Health segment and in the Defense segment as compared to the other segments of the business, because, of the large program wins that we've had and the pace of the ramp up in both Defense and in Health. As Roger mentioned, we're getting a full point of growth just off of the DHMSM program. So, I think that that helps you with kind of setting up what the growth profile is like of the segments.
Robert Spingarn -- Credit Suisse -- Analyst
And what are the biggest swings in your revenue guide, that $400 million, program-wise or how do we think about what you're assuming at the low and high end?
James Reagan -- Chief Financial Officer
Well, I think what I am understanding, you're wondering, well, what could give rise to the low end, what could give rise to the high end. Well --
Robert Spingarn -- Credit Suisse -- Analyst
Yeah, the $10.5 billion versus the $10.9 billion.
James Reagan -- Chief Financial Officer
Yeah. We've got a lot of bids that are -- $28 billion of bids outstanding at the end of the year. One of them, we've already pulled in from bids outstanding and into backlog, and that's the NASA NEST program, which was a takeaway, meaning it's obviously additive to our growth profile. That's reflected in our guide.
And I think the high-end would be achieved if we kind of ran the table on the big ones and set us up for a 2020 that is growing at or potentially above what we're guiding to now. On the low end, It would be a significant drop in our win rates. For the last year, we've been experiencing win rates that reflect, first, the very competitive cost position that is now showing up in the velocity of new awards. The second, it is we have a well-defined set of technical differentiators that is probably more prominent in our win rates than the cost competitiveness. And third, the efficiency of our business development process is not only yielding great technical scores, but it is reducing the cost that we need to put into winning X dollars of new backlog.
So, those three things are really bearing out what I think gives us the confidence of at least the midpoint of our revenue guide, if not a little bit more.
Roger A. Krone -- Chairman & Chief Executive Officer
Hey, Rob. It's Roger. Just a quick follow-up on the NASA program. We're still in that kind of unique period between announcement and debrief and the protest period. So, we have a couple more days to go to see whether one of the competitors is going to file a protest. So, we haven't exactly booked that into backlog yet. And when we do, it's a single-award IDIQ and we'll probably book the first task order just so that people don't go out and put $2.9 billion in backlog. It's probably likely in the quarter of -- in the hundreds of millions, not in the billions. But just as a technical point, I wanted to make sure that I was clear in my comments that it's still subject to protest. Thanks.
Robert Spingarn -- Credit Suisse -- Analyst
And, Roger, just on the back of that, are there any specific awards that you would call out as being within the revenue synergies that, at the time of the deal, you weren't yet ready to talk about, but now a few years in here, what are you seeing revenue synergy wise?
Roger A. Krone -- Chairman & Chief Executive Officer
Well, Rob, that's a great question. It's one we haven't had for a while. NASA NEST is clearly won. That is a program that really has come out of capabilities that came across in the merger with IS&GS and the combination of some of the things that we have done on the technology side and the cyber and the relationship that IS&GS had with the end user at NASA as part of that. I would say I think our probability of win on Hanford is enhanced by bringing the company together. Clearly, that was a heritage IS&GS contract. But I think we added more innovation in our offering.
You can look at Navy next-gen, I think, with the same view, a program we might or might not have bid as stand-alone Leidos, but clearly felt we had a compelling offering to bring forward to the program and just to kind of round out the SENS3 program and the Department of Homeland Security one that we won last year, I think I would put in synergy. We won an ABIS contract, which is an Army biometrics win, which is a collection of sort of IT and technology to be able to recognize individuals based upon biometrics, and there's a whole host of classified wins. I talked to AIML in my comments, and that has been of particular interest in the intelligence community and it's led to some wins there as well.
So, really, a lot of -- again, we don't talk a lot about synergy, but a lot of cross linkages of the two business and a lot of strength in things that we can go after that we couldn't have gone before and then overall increasing our (inaudible).
Robert Spingarn -- Credit Suisse -- Analyst
Thank you, both.
Roger A. Krone -- Chairman & Chief Executive Officer
Thank you, Rob.
Operator
Thank you. (Operator Instructions).
Our next question is coming from Jon Raviv from Citi. Your line is now live.
Jon Raviv -- Citigroup -- Analyst
Hey, good morning.
Roger A. Krone -- Chairman & Chief Executive Officer
Good morning.
Jon Raviv -- Citigroup -- Analyst
Jim, can you just walk us through just some of -- a little bit more on the risks and opportunities in this year's sales guidance and I'm thinking about it specifically in relation to a year ago where, obviously, fell a bit short in 2018. I just want to make sure that the bias is really more to the upside in this year's guidance versus last year's guidance. Thank you.
James Reagan -- Chief Financial Officer
Sure. Well, we always like to hit the guidance down the middle of the fairway. The NASA NEST win certainly gives us a little bit more confidence as it's yet another takeaway win, which builds the revenue volume and adds to our growth. So, just to put a little bit more color on my comments of just a minute ago, I will repeat, continuing to run at high win rates on takeaway and new business work, new contract awards that are kind of new to our peer group, that's one. And we continue to see really great results in win rates that reflect the execution in our business development teams.
Going back to kind of what are the things that could be a dampener of our growth rate, and that would be if the clearance process slows down or if the handoff from OPM to DoD doesn't go as, I think, DoD or we would expect. I think that that could be one risk factor to revenue growth. And then, the second one would be kind of a change in the success that we've been experiencing in business development. That and our hiring processes so far -- we're pleased with what we're seeing out of our recruiting teams, but if the labor market has a sudden tightening from where we see it today, that could slowdown down our ability to hire people needed to execute on contract backlog.
Jon Raviv -- Citigroup -- Analyst
Okay. And then, in terms of some of the bigger recompetes this year, can you just potentially give a little more color, perhaps even quantify some of that exposure in terms of sales, but also in terms of profits? The docs make it look like Hanford big on sales, but doesn't add much income. Could you just level-set us on those, please?
James Reagan -- Chief Financial Officer
Yeah. You just mentioned Hanford. And probably, the other large recompete that we have is GSM-O, which -- we don't disclose the dollar values of both the revenue run rate or the margin details at the contract level. But, clearly, GSM-O would be one that we're planning on rewinning. And if we get surprised on that one, that could be a dampener, not so much for 2019, though, but more for 2020. That contract, regardless of the outcome, is going to continue to run well into 2019 for us.
Jon Raviv -- Citigroup -- Analyst
Thanks. I'll stick to the two.
James Reagan -- Chief Financial Officer
Okay. Thanks, Jon.
Operator
Thank you. Our next question is coming from Noah Poponak from Goldman Sachs. Your line is now live.
Gavin Parsons -- Goldman Sachs -- Analyst
Hey. Good morning, everyone. It's Gavin on for Noah.
Roger A. Krone -- Chairman & Chief Executive Officer
Hey, Gavin.
James Reagan -- Chief Financial Officer
Hey, Gavin.
Gavin Parsons -- Goldman Sachs -- Analyst
Hey, guys. Nice to see bookings strength translating to revenue growth, but I think the margin pressure is kind of right in line with that 10% plus you're talking about, which maybe seems like a lot of pressure just on the rate of growth you're experiencing. So, I was wondering if you could talk a little bit about your strategy to grow EBITDA dollars. And, Roger, I appreciate the color that, earlier on, the contracts have lower margins and later on you can book them at a higher margin. But whether or not these will be accretive on average over the life of the contracts and how you think about bidding when the margin initially is this low.
Roger A. Krone -- Chairman & Chief Executive Officer
Okay. Complex question. Let me see if I can unpack it a little bit and then I'll look to Jim. Let's see. We have a pipeline and we kind of filter against the pipeline and we look at the structure of a contract and our ability to generate at or our target over the life of the program.
We are in a fortunate position where we can decide what to bid and what not to bid. We've talked in the past about staying away from, what we used to call, lowest price technically acceptable because it, traditionally, has lower margin. And, frankly, it's probably not the work that we are best equipped to do.
We become more interested in a program where we can create a point of difference through our discriminators, our technology, our cost structure and our size. And as such, we hope, over the life of the program, right, to be accretive to our long-term EBITDA margin.
I think it was Jon who talked about Hanford. There are some programs just by their nature are going to be lower. Hanford is one of them, has always been that particular customer. Just views the programs differently. Hanford is a very important program to us. We use it for a lot of past performance quals. It's a hugely important program for the nation and cleaning up the 600 square mile site in Southeast Washington is really, really important work.
But, generally, we are looking at the portfolio and the pipeline with an eye to 10% or better on EBITDA. I think you reemphasized, is that often when we get started we are more thoughtful about our booking rate and how we ramp up. And if programs are going to have transition issues, it's usually in the first year or so. So, it behooves us, and I think everyone in the industry does that, to be more thoughtful about our earnings rate in the early contract. But because of our technological differentiators, we have the luxury to go after higher value-added work, which typically carries more margin with it.
Gavin Parsons -- Goldman Sachs -- Analyst
Got it. And then, Roger, you talked about the DoD budget aligning well with your portfolio. Can you give us a little bit more color on kind of how you'd expect those priorities to go between hardware and kind of your addressable market?
Roger A. Krone -- Chairman & Chief Executive Officer
Well, Secretary Shanahan is in -- I think in the first year or two, they were looking at operational capability rate and getting the fleet and other hardware back up to a higher operational tempo. We certainly benefited from that. They are now focused toward buying end items, ships and tanks and airplanes, but not necessarily at the expense of their operational tempo. But what really excites me is the digital transformation that's going on, not only in the Department of Defense, but across federal space writ large. They have gotten to operate more efficiency, to open up more sort of obligation authority to buy hardware and to pay troops and to defend the country, and that's right in our sweet spot. We're really, really good at digital transformation, move to the cloud, software-defined networks and that gets us excited.
But we're also seeing a bit of a shift in how I think the Department views the threat. And a lot of discussion if you read the national security strategy, is what we call the physical and the kinetic threat is still important, but the virtual threat is becoming even more important. What's going on in cyberspace, some of the newer technologies, and that fits really well with where we are. We're not necessarily a company that builds tanks and big aircraft carriers and things like that. We are much more in the soft technologies -- software, cyber, areas like that, electronic warfare and we see increased spending in those areas.
Gavin Parsons -- Goldman Sachs -- Analyst
Thank you.
Operator
Thank you. Our next question is coming from Greg Konrad from Jefferies. Your line is now live.
Greg Konrad -- Jefferies -- Analyst
A really strong booking year and quarter. Can you maybe talk about some of the initiatives outside of DHMSM in place that's supporting both the improvement in bookings and the revenue outlook for next year?
Roger A. Krone -- Chairman & Chief Executive Officer
Yeah. I think so. So, this is Roger. And if you've been following our story for a while, you know that about two years ago we had lost some programs that we thought were franchise. And it really caused us to go back and look at our whole business development process from cradle to grave. And we looked at what we call our win plan, how we write proposals, the staff that we had, how we view the competitive discriminators. And, as we've said frankly often on this call, over the past several quarters, we kind of started over and we took a clean sheet and Gerry Fasano and now Roy Stevens in business development, and we looked at why we were winning and why we were losing and how we presented our competitive discriminators, even down to what bids that we were bidding on and whether we really felt we had a compelling point of difference on those bids. And I would say I think we've gotten better across the board, better in identifying the opportunity, putting it in the pipeline, working early in the bid process with the customer to understand what their compelling needs actually were. And then, just the way we go about actually structuring and writing a proposal, how we deal with the proposal center, how well we represent our capabilities in between the front cover and the back cover of the proposal.
Another point that we made that's really all the way through this journey from the acquisition is there was, I think, a thought that IS&GS, the Lockheed business, had become less cost competitive in some of the bids that they had made kind of being tucked inside a large OEM. And we had huge emphasis on bringing their overhead and SG&A, therefore their wrap rates, down to where we had been historically. And we look at our wins and our losses, we do a lot of forensics. And I wouldn't say we have not lost any bids based upon price, but the number of bids that we have lost based upon our cost structure is down to just a very. And so, we are pleased with how we have used our cost structure to solve that problem and that has allowed us to focus on superior technical offerings that create a point of difference for the customer.
Greg Konrad -- Jefferies -- Analyst
Thank you. And just a follow-up on your commentary around employees and employment. Is there any way to think about headcount growth for the year? And are you seeing any signs of any type of wage inflation?
James Reagan -- Chief Financial Officer
Yeah. Greg, we don't provide headcount targets. I can tell you that, compared to what our internal targets are, we're doing well in growing our direct employees compared to our plan.
And then, the other thing on wage inflation, we do put a plan in place for growth in in-market salaries that is consistent with the benchmarks that we see published externally. And so far, we're not seeing any pressure on those assumptions that we have in our plan. The market is, obviously, pretty competitive for the kinds of people we are hiring. But given our scale and given the breadth of different things that people can work on here and a competitive salary and benefit structure, so far we're able to achieve our hiring numbers.
Operator
Thank you. Our next question today is coming from Rick Eskelsen from Wells Fargo Securities. Your line is now live.
Richard Eskelsen -- Wells Fargo Securities -- Analyst
Hi. Good morning. Thank you for taking my question. Just to clarify on the guidance commentary for the DHMSM contract, it's 1 point to growth throughout the guidance or is it a 1 point addition at the high end? And then, also, can you talk about any grow-over amount for the commercial cyber, which I believe you said was not in the forward guidance? Thank you.
James Reagan -- Chief Financial Officer
Thank you. Yeah. So the way, first of all, we think about DHMSM is that 1 point of growth is inclusive of the -- our guidance implies 5% growth. That number includes roughly a point for our DHMSM.
The second point to commercial cyber, the commercial cyber number, that midpoint of growth would be higher if you back the commercial cyber number out of our 2018 results. But at this point, we have to keep those numbers confidential for terms of our agreement with the buyer.
Richard Eskelsen -- Wells Fargo Securities -- Analyst
Thank you.
Operator
Your next question is coming from Tobey Summer from SunTrust. Your line is now live.
Tobey Summer -- SunTrust Robinson Humphrey -- Analyst
Thanks. With respect to your comment on the budget and having a constructive outlook, does your commentary for the Defense and Intelligence budget hold true for the whole budget, including Civil? And could you comment if currencies take a little bit of the edge off of your revenue growth guidance for '19?
Roger A. Krone -- Chairman & Chief Executive Officer
I'll do the first one. I think that was a foreign exchange question on the second one. Let's see. Here's a comment that I want to make sure everybody understands, is that -- so, I think we're all comfortable with what's going on in the Department of Defense. Clearly, there's been a lot of attention in what's going on in the Department of Homeland Security. We are optimistic in the parts of border security in which we operate our VACIS system, what we do relative to vehicle inspections. We believe that has a significant role to play in the vision of this government in securing the borders.
And so, not only are we pleased with what we're seeing out of the Department of Defense, in those areas in our Civil business where we have visibility into the budget, we are also quite pleased. We think there was a large amount of fentanyl that was used at the border a couple of weeks ago. And it is those technologies which we think we will be able to provide to the government and they will fuel our top line growth.
By the way, we kind of feel the same way about what's going on in DoE and FAA and a lot of the other civil organizations.
James Reagan -- Chief Financial Officer
Yeah. And then, relative to the currency question, we don't see currency as being a material headwind or tailwind for 2019. There was a little bit of a headwind in 2018, but I wouldn't call it material with respect to the overall number. Just a reminder that international or foreign denominated contracts are roughly 10% of our overall business.
Operator
Thank you. Our next question is coming from Joseph DeNardi from Stifel. Your line is now live.
Joseph DeNardi -- Stifel Nicolaus -- Analyst
Yeah. Good morning. Jim, I think you've talked in the past a little bit about your M&A focus and not having much of a desire just to acquire pure-play services businesses and maybe want to increase your exposure to products and hardware. I'm wondering if that means, looking at services business that may have a product or hardware component to them or whether you'd be willing to acquire kind of or look at pure-play hardware and products businesses?
James Reagan -- Chief Financial Officer
Joe, great question. And the short answer to both parts of your question is yes. For us, we have less interest in a pure-play services business, especially one that looks in terms of its customer footprint a lot like us. We don't need more of what we've got. We can compete and expand the business that we have just fine on our own.
The things that we're looking for to build the company inorganically would be the kind of company with both the services and a product differentiator that bolts in well with the kind of work that both the target company and we do.
A pure product company could also be of interest to us, although I would say that the ones that we've been interested in to this point tends to have some kind of service element to them, but I wouldn't say that we're not interested in -- I wouldn't say we'd shy away from a pure product business if it was strategically -- if it fit our strategic criteria.
Operator
Thank you. Our next question is a follow-up from Jon Raviv from Citi. Your line is now live.
Jon Raviv -- Citigroup -- Analyst
Hi. Thanks for taking the follow-up. Roger, In your prepared remarks, you had mentioned 2019 and beyond. Could you talk a little bit more about that beyond by any chance? Maybe a small preview for the event in May, especially now that the combination is done?
Roger A. Krone -- Chairman & Chief Executive Officer
A little bit is -- we kind of came out of the merger and we talked about 3% growth and 10% and, of course, now we're printing a little bit better than that. As you know, we are a long-cycle business and with $28 billion -- If you take the $2.9 billion out for NASA NEST, $25 billion -- in unawarded. Most of that is going to impact beyond 2019. The way things work if they make an award to us, this year, we ramp up. You really don't see those revenues until 2020 and beyond.
And as excited as we are about 2019, if you just run your model as we do and you'll run similar models, you can see that that -- the submits unawarded is going to have a larger impact on 2020 than it will on 2019. And it's the government's need for the types of solutions that we provide that gives us enthusiasm about the future and our strong balance sheet and cash conversion gives us the currency, if you will, to invest in the future and to grow the business.
And so, as excited as I was five years ago when I came excited and as excited as I was about the merger with IS&GS, I look at the budget prospects and the needs of the government and 2019 is going to be year for us. But I think 2020 will be even better.
James Reagan -- Chief Financial Officer
Yeah. And to pile on there, Jon, about two-thirds of our pipeline is either new work or what I call OPB, other people's business. And so, with two-thirds of that representing things that are other than just keeping and recompeting our existing work, to Roger's point, I think the profile of the pipeline certainly speaks well for some growth opportunity.
Operator
Thank you, our next question is a follow-up from Krishna Sinha from Vertical Research Partners. Your line is now live.
Krishna Sinha -- Vertical Research Partners -- Analyst
I just wanted to get an update on capital deployment. Obviously, you've made some comments that you're just going to try and maintain the dividend at a kind of steady rate, but just focusing more on the buybacks and the M&A opportunity and how you're thinking about those in 2019, are you close to any sort of bolt-on deals or have any in the pipe that you think could close within the next 12 months that we should be aware of? Or since you'd be generating cash here, should we think about the buyback sort of staying at this pretty high cadence that you've been generating in the last two quarters?
James Reagan -- Chief Financial Officer
Yeah, Krishna, I think that if you compare where we sit today and looking at the M&A pipeline, I wouldn't say anything different about it compared to what I said last quarter or the quarter before that. We've got an M&A team internally that is looking at ideas that are consistent with our strategy. But we're very focused on doing good deals, not just deals for the sake of prosecuting a pipeline.
So, a couple of other factors that I would point out to answer your question, we're very comfortable with our leverage today and we have plenty of dry powder and ability to take on more leverage, particularly today's rates, to buy the right kinds of assets.
But with that said, we're also not going to sit around waiting for something to come under contract before we make a decision on whether to deploy. So, you could see a year -- we could be looking back on 2019 as being a year when we made a couple of acquisitions or an acquisition, but we also were able to deploy capital with some buyback and the normal level of debt buyback.
Operator
Thank you. Our next question is coming from Joseph DeNardi from Stifel. Your line is now live.
Joseph DeNardi -- Stifel Nicolaus -- Analyst
Yeah. My follow-up was going to be, if, Roger, you can just talk about the sensitivity to a CR in 2020 and maybe just the mechanics of how that would look. I think kind of the impact to spending would be more pronounced because the budget would get set at the sequestration level whereas FY '19 just got set at FY '18's level. So, maybe I'm wrong. Can you just kind of walk us through what your expectations there would be if there is a CR to start FY '20? I know it's a long way away, but just want to get your thoughts. Thank you.
Roger A. Krone -- Chairman & Chief Executive Officer
Joe, you have it just about right. If we end up with a CR, we could snap back. And if we don't do this right, we could be back to the sequester caps. And I touched on that in my remarks. I'm not the best person to predict what's going to happen in the government. I will tell you, I have been encouraged by what the Department of Defense has done and their ability to cross the river and talk to the hill and to explain to our elected officials how important it is to get a budget.
I've been optimistic before about the ability of the department to actually get a budget passed. I'm also optimistic, moving into what is going to be a presidential election season, that people are not going to be distracted by a continuing resolution, which snaps us back to the sequester caps and requires the department to curtail programs. And so, if I was up-funded (ph), I would tell you, I think it's more likely that we're going to get some kind of a negotiation and we will get a budget rather than a CR. But the mechanics of what happens in a CR, you have about right. And if we win all the way back to the sequester caps, I think the department would have to take some significant measures to be able to get their budgets back underneath that.
As you know, once they start spending on aircraft carriers and F-35s and things, there is a future bill to be paid. And when they commit to like a bulk buy of two aircraft carriers, that's with the assumption that they're going to get most of what they ask for in their budget request in the future. If you snap the budget back to sequester caps, they're already committed to build those aircraft carriers and it creates a real planning dilemma for the department. And because of that, because I think our elected officials understand the importance of defending the country and they don't want this to become a topic in the presidential debate, I think we'll probably end up with a budget.
Operator
Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over to Kelly for any further closing comments.
Kelly Hernandez -- Senior Vice President of Investor Relations
Thank you, Kevin. And thank you all for joining us this morning as well as for your interest in the company. Have a great day.
Operator
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
Duration: 66 minutes
Call participants:
Kelly Hernandez -- Senior Vice President of Investor Relations
Roger A. Krone -- Chairman & Chief Executive Officer
James Reagan -- Chief Financial Officer
Cai von Rumohr -- Cowen and Company -- Analyst
Krishna Sinha -- Vertical Research Partners -- Analyst
Robert Spingarn -- Credit Suisse -- Analyst
Jon Raviv -- Citigroup -- Analyst
Gavin Parsons -- Goldman Sachs -- Analyst
Greg Konrad -- Jefferies -- Analyst
Richard Eskelsen -- Wells Fargo Securities -- Analyst
Tobey Summer -- SunTrust Robinson Humphrey -- Analyst
Joseph DeNardi -- Stifel Nicolaus -- Analyst
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