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Leidos Holdings Inc  (NYSE:LDOS)
Q1 2019 Earnings Call
April 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Leidos Q1 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Kelly Hernandez, Investor Relations. You may begin.

Kelly Hernandez -- Senior Vice President of Investor Relations

Thank you, Brock, and good morning, everyone. I'd like to welcome you to our first quarter 2019 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team.

Today, we will discuss our results for the quarter ending March 29, 2019. 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 the supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com.

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

Roger A. Krone -- Chairman and Chief Executive Officer

Thank you, Kelly, and thank you all for joining us this morning for our first quarter 2019 earnings conference call. Our results in the quarter show a strong start to the year. All of our businesses achieved growth, with a notable acceleration of growth in our Defense Solutions business.

The revenue acceleration at margin levels above 10% reflect a continued careful management of our portfolio as we drive the organization to grow revenue and EBITDA. We again set new records in backlog as we continued our momentum in winning programs and driving bookings. Our focus on competitive differentiators has been the key to our success. By leveraging these differentiators and the scale of our organization, we have improved our win rates and conversion of our pipeline to revenue. This year, we are continuing to execute this strategy positioning ourselves well to further our growth. We look forward to sharing more about this strategy with you in a couple of weeks at our Investor Day. We developed an exciting agenda for this event, where we will provide you with more depth in our business, our competitive positioning and our strategy. You'll also have a chance to hear from and interact with our management team and see demonstrations of several of our innovative technologies.

Turning now to the quarter's results. Revenue growth continued to accelerate as we added talent to ramp up on our new programs. From a business development perspective, we had a very active quarter in both submits and awards. Despite the temporary government shutdown, we booked $3.3 billion of awards into backlog, which drove a book to bill of 1.3 for the quarter.

In addition, we were also awarded another approximately $1 billion in contract values during the quarter, which were subsequently protested, and as such, are not reflected in our bookings. We also won seats on several new IDIQ vehicles, which allow us an opportunity to further expand our market penetration and grow our revenues.

During the quarter, we submitted a significant level of bids, including several multi-billion dollar programs. We exited the quarter with over $36 billion in submits awaiting decisions. When combined with our record backlog and strong win rates, the record level of submits outstanding gives us confidence in our ability to continue our growth momentum.

Profitability during the quarter came in slightly better than expected. Our focus on program execution and the use of differentiation to drive margins, particularly for fixed price work offset the impact of the high volume of early phase revenue from new program ramps. The strong revenue and profitability contributed to a better than seasonal level of cash from operations. This was augmented by cash generated through our balance sheet and portfolio optimization activities. We were very active in this area in the first quarter as we closed several transactions, including two real estate sales and the divestiture of our commercial cybersecurity business, which together drove $267 million in cash inflows, and significantly increased our deployable cash balance.

Our focus on generating cash from the business is matched with equal attention by our commitment to returning capital to our shareholders in a thoughtful and balanced manner. Our capital deployment philosophy remains unchanged. Prioritizing investing for growth, both organically and through M&A, maintaining our regular quarterly dividend and repurchasing shares. During the quarter, we returned $200 million to shareholders through the execution of an accelerated share repurchase, which we announced in February. We also returned $54 million to shareholders through our regular quarterly dividend.

From a macro perspective, we are encouraged by the initial proposed fiscal 2020 budgets. Both the OMD and Congress recognize the urgency with which our country needs to invest in new technologies and infrastructure that keep us safe and technologically superior to our adversaries. At this point, we're assuming we will enter the government fiscal 2020 with the continuing resolution, but it's too early to predict the level. We are hopeful for a possible bipartisan two-year budget deal as it appears Speaker Pelosi and Majority Leader McConnell (ph) are in early talks.

That being said, we remain focused on what is in our control and on driving share gains in the areas that align with our customers' priorities. Finally, before I hand the call over to Jim, I'd like to mention a couple of recent awards that recognize our commitment to diversity and our dedication to maintaining a strong culture of ethics and integrity.

First, the Company was included in the 2019 Bloomberg Gender-Equality Index, which distinguishes companies committed to transparency and gender reporting in advancing women's equality. We attained best-in-class rankings for several category, highlighting just a few of the reasons Leidos is a great place to work. These categories include family care, healthcare, flexible work, career development and our diversity and inclusion strategy. This recognition is the result of our unwavering commitment to gender equality at all levels of our Company and we will continue to nurture an atmosphere that applauds diverse cultures and perspectives, which leads to better business outcomes and employee retention.

Second, during the quarter, Leidos was again recognized as one of the World's Most Ethical Companies by the Ethisphere Institute. This designation recognizes companies that influence and drive positive change in the business community and societies worldwide. These values are embedded in our culture and reinforced by the actions of our employees every day.

Along these lines, specifically during the quarter, we continued our sponsorship of the first robotics program. Our flagship stem education program providing students in the communities in which we operate with real world engineering experience. Our employees volunteered more than 7,000 hours sponsoring competitions and mentoring teens nationwide. 14 of which advanced to the World Championships. Over the past decade, Leidos has donated nearly $3 million to stem education programs and our employees have logged (ph) thousands of volunteer hours on these important initiatives as we help faster America's next generation of technical professionals. My congratulations to our employees on their support and dedication to our communities.

With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer for more details on our first quarter results.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Thanks, Roger, and thanks to everyone for joining us on the call today. We're pleased with our strong start to the year and our growth momentum. I'll start by sharing some highlights from the quarter. First quarter revenues grew 5.5% over the prior year period demonstrating the continued execution of our successful growth strategy and putting us solidly on track to deliver to our top line growth targets for the year.

Adjusted EBITDA margins of 10.1% were slightly better than our expectations. Strong program performance offset some of the impact we anticipated from the higher mix of early phase program revenues as we ramp up the new work from last year's awards. Non-GAAP diluted EPS in the quarter of $1.13 was up roughly 10% year-over-year, primarily reflecting a lower non-GAAP effective tax rate and a lower share count. Note that this excludes the gain on the sale of our commercial cyber business of $88 million.

Operating cash flows were above seasonal levels reflecting earlier than expected advanced payments on certain programs. Investing cash flows of $237 million reflects the proceeds from several transactions that closed in the quarter. The transaction proceeds include $171 million from the sale of our commercial cyber business and $96 million from the sale of three of our buildings in Gaithersburg and San Diego. These transactions further the monetization of our balance sheet, when ongoing initiative which we continue to execute to drive increased return on invested capital.

Combined, these items offset by our capital expenditures and the execution of our ASR increased our cash and equivalents balance over $200 million sequentially to $536 million at the end of the quarter. We continue to thoughtfully deploy excess cash against our stated capital deployment policy. Over the past 12 months, we have returned more than $800 million to shareholders. A quarter of that through our regular dividends and three quarters through our share repurchases. And before I turn to our segment results, I'd like to provide an update on the hiring given its importance to meeting our growth objectives.

Our progress on this front has been great thus far this year. Despite the tight labor market, we've hired over to 2,000 new employees just in the first quarter, and we're on track to meet our headcount goals for the year. Our ability to ramp successfully on our new programs depends heavily on hiring the best available talent. We will continue to use our innovative programs to aggressively recruit top talent and maintain our growth momentum.

Now for some highlights from our segment results. For the Defense Solutions segment, revenue growth accelerated significantly to 6.6% year-over-year growth compared to the prior quarter's level of 3.6% year-over-year growth. This strength reflects the continued expansion of our base business as we ramp up on our programs that we have won last year. Non-GAAP operating margin decreased 80 basis points from the prior year period due to a lower level of net profit write-ups. We booked $1.2 billion of net awards in the Defense Solutions segment resulting in a 1.0 book-to-bill for the quarter were 1.3x on a trailing 12 month basis.

In our Civil segment, first quarter revenues reflect a typical seasonal sequential decline compounded by the effect of the government shutdown and the sale of our commercial cyber business. These factors depressed the otherwise strong year-over-year growth in the business as we continue to ramp up the new programs that we won last year. A higher mix of early phase program revenues combined with a lower level of net profit write-ups drove the year-over-year decline in non-GAAP operating margins to 11% for the quarter. Civil generated $550 million in net bookings resulting in a book-to-bill for the quarter of 0.7x or 0.9x on a trailing 12 month basis. While typically a light quarter for bookings for Civil, this quarter did see some impact from the delayed bookings and award activity as a result of the government shutdown.

Turning now to our Health segment. Revenues in the quarter grew significantly, up nearly 9% year-over-year, reflecting the ramp of deployment activity on the DHMSM program and a higher level of on contract growth in other areas of the business. Non-GAAP operating margins in our Health business were 11.9% in the quarter. And despite a 60 basis point year-over-year decline, margins continue to be accretive to the overall company. The year-over-year decline primarily reflects the lower level of net profit write-ups as well as the return to a more normalized margin profile on certain programs, which we have discussed previously. Our Health segment saw a very strong bookings in the quarter, which drove a book-to-bill of 3.3x. Net bookings primarily reflected an increase to expected volume of services based on modifications received on existing programs.

Overall, the growth achieved in all of our businesses furthers our confidence in our strategy and our ability to deliver to our guided targets.

Before I discuss our forward outlook, I'd like to spend a moment discussing the impact of the new lease standard ASC 842 to our financial statements. The primary impact of the new standard, which we adopted during the quarter, is that requires the presentation of operating leases on the balance sheet. As such, beginning this quarter, you will find two new light line items on our balance sheet, an operating lease right-of-use asset of $406 million and our long-term operating lease liabilities of $305 million. The short-term portion of operating lease liabilities is reflected within accounts payable and accrued liabilities. Additional details are provided in Note 4 of our 10-Q. Importantly, the adoption of this standard has an immaterial impact on both the P&L and the statement of cash flows.

With that I'll move now onto our forward outlook. First, as a result of the $200 million accelerated share repurchase executed in the first quarter, we are increasing our non-GAAP EPS guidance range by $0.05 to a range of $4.30 to $4.65. Second, on the strength of our results so far in the year-end and reflecting our expectation of ongoing balance sheet monetization items, we are increasing our operating cash flow guidance by $100 million to at or above $825 million for the full year.

And finally, we are also updating our CapEx view for the year to reflect an incremental investment of approximately $40 million for program-related assets. We expect this investment will ultimately be fully recovered through margin accretive program revenues in 2020 and beyond. We have occasionally made such investments and where it makes good financial sense we will continue that practice. And as a result of the investment, we expect CapEx of approximately $175 million for the full year inclusive of the real estate related assets previously disclosed. The detail on this is again included in Slide 10 of our earnings presentation. Guidance for revenue and adjusted EBITDA margins will remain unchanged.

And with that, I'll turn the call back over to Brock, so we can take some questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question today comes from Rob Spingarn of Credit Suisse. Please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, good morning.

Roger A. Krone -- Chairman and Chief Executive Officer

Good morning.

Robert Spingarn -- Credit Suisse -- Analyst

Good numbers, guys, especially the top line growth, the consistency there. I wanted to start though with the margins. And you mentioned lower margins on recompetes as a driver the decline in the Health operating margin? And I wanted to get a sense of how that profiles going forward to these margins. Do these go up over time, or is this just reflective of the pricing on these big contracts?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Hey, Rob. This is Jim, thanks for jump into today. In prior periods, we've talked about one of our programs in the Health business rolling off and into a recompete. That had previously been delayed, which is why for a couple of quarters last year, we had margins in the Health business that were higher than what we had kind of set up as an expectation. That recompete has cycled through. And as a result, I think that the margins that we're seeing now, we can expect to be relatively flat through the year.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then, just I think Roger called that dim summer, maybe it was you Jim, how do we think about dim sum, and then the VA contract in terms of where they are with regard to their ramp? When should we see each plateau? And to what extent are these driving these bigger book-to-bills?

Roger A. Krone -- Chairman and Chief Executive Officer

Okay. Rob, I'll start off, there's like three parts to that. First of all, this is a year of ramp for dim sum and we've talked about that literally for years. And we're in Wave 1 and we will start what is the second wave, although we collect Wave 4 in the fall, and that will allow us to ramp the program, again as we've talked about before. The VA program, we are a smaller piece of that. And again, it's not our program, we cannot refer you to the prime on that program. And there were some events and some MoDs in the period that allowed us to books some backlog on DHMSM, and I'll turn it over to Jim for any further comments on that.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, just in terms of the book-to-bill that we saw in the Health Group, Rob, again 3.3x. A piece of that came from the DHMSM program, where as a result of a contract MoD that we've received, it gives us much better definitization and visibility of the rest of the program and that resulted in a nice slug of additional bookings.

Robert Spingarn -- Credit Suisse -- Analyst

Is there a way to quantify where these two programs are as a percentage of the $2 billion or so you're doing annually in the Health business, and where they'll peak?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes. We don't guide to segments and you've heard us talk about that before, but -- and we haven't previously, and I don't know if you want to get in the habit of talking about DHMSM and the VA programs in terms of with any precision, what kind of percentage they are of the overall Health business. But I would point out that there is other work that we're executing on in the VA, and within Social Security and with CMS and we consider the Health business is being more than just DHMSM and the VA-EHR program, it is something we are executing very well on across all of the Health segment.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you. I'll jump back in.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Great. Thanks, Rob.

Roger A. Krone -- Chairman and Chief Executive Officer

Thanks, Rob.

Operator

The next question comes from Cai von Rumohr of Cowen & Company. Please go ahead.

Cai von Rumohr -- Cowen and Company, LLC -- Analyst

Yes. Thanks so much and good quarter. You mentioned EACs, how did the EACs compare relative to last year?

James C. Reagan -- Chief Financial Officer and Executive Vice President

What you heard the -- say in the commentary, Cai, is that across all of our segments we had lower net EAC write-ups than we did in Q1 a year ago. We had a lot of EAC true-ups a year ago that had up graft in margin. That was more notable in Q1, certainly than it is now. And the level of VAC write-ups, while it is lower than a year ago, it is consistent with the numbers that we had modeled when we provided the forward-looking guidance. And there is some -- we will have more detail and the notes to the financials on what those write-ups look like by group.

Cai von Rumohr -- Cowen and Company, LLC -- Analyst

Okay. And turning to your bookings potential, maybe update us on when you expect the protest to expire on NEST? And any the large bookings decisions that are coming up GSM-O, Hanford and NextGen are? Thanks.

Roger A. Krone -- Chairman and Chief Executive Officer

Let's see. Let's see if we can cover those in order. We think hopefully NASA NEST will be in the month of June, assuming it's the 90 day or 99-day period. Cai, as we all know those things are a little bit unpredictable, but our hope is that we'll reconcile that. We actually have a second smaller opportunity that's also in protest. I think it's with the Air Force. That's probably a month behind that. And then our sort of three large programs may be NextGen, the contractors all bid in the first quarter. So you can expect sort of a mid-year decision. And if there's a protest behind that, then it's pushing the end of the year. It's been -- how those things go may or may not, actually be booked by any one this year. And then for us, we have Hanford and GSM-O, or the Global Solutions Management-Operations program.

Hanford, again, we are submitted on that with probably later in '19, and that could be subject to a protest. And then GSM-O is sort of on the same schedule, where which probably in the fall, and again another large multi-billion dollar program that one could expect to be protested. So it's interesting NextGen, Hanford and GSM-O, although all three may get awarded this year, Cai. I think it's likely that those bookings may push into next year, because of protest. But, of course, if they're not protested then the winner will bid a lot of (inaudible) this year.

Cai von Rumohr -- Cowen and Company, LLC -- Analyst

Thank you very much.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes.

Operator

The next question is from Shelia Kahyaoglu of Jefferies. Please go ahead.

Shelia Kahyaoglu -- Jefferies -- Analyst

Thank you. Good morning, guys.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Hi, good morning.

Shelia Kahyaoglu -- Jefferies -- Analyst

Just on the pipeline. Just a follow-up on that, you mentioned $36 billion in bids. That's up from $28 billion last quarter. What's driving it, if you could give a little bit more color there.

Roger A. Krone -- Chairman and Chief Executive Officer

Shelia, mostly the bids that I can just referred to, because they are we don't quite tell you what the bid price was, but they are currently in the multi-billion dollars. And so it was a -- although the usual volume, also I think some awards certainly in civil are probably delayed because of the shutdown. So there's a little bit of accumulation of pipeline there. But it was these large Navy NextGen, Hanford and GSM-O that when you're bidding multiple billion dollars awards. That's what drives the pipeline up so high. But where $36 billion is a record high for us and is kind of an unbelievable number given those of us who've been on this journey for a while, that's kind of exciting, it's a little bit amazing that what this team has been able to do.

Shelia Kahyaoglu -- Jefferies -- Analyst

Okay, got it. So just the sequential probably more Navy NextGen than anything else. And then, I appreciated the color on the headcount, I think you increased headcount by 6% this quarter. Just any more color there what areas are you hiring in is the sense of demand, or just timing of when the workforce is coming in? If you could give a little bit more on that. Thank you.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes. Shelia, what I would -- this is Jim, what I would tell you is that when you're growing nicely across all the segments, particularly as we think about the ramp up of DHMSM in the Health Group, we think about the ramp up of the ASIT award in the Civil Group, which we won last year in the second quarter. We're continuing ramping on that. We have a large DOE program that we won last year. And then, of course, we've won a nice slug of classified contracts over in the Defense Solutions segment. All of these are requiring us to be adding headcount. And so, when we talk about the 2,000 heads -- 2,000 associates and employees we've hired across the business there -- across all of our business segments.

Shelia Kahyaoglu -- Jefferies -- Analyst

Okay. Thank you for the color.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Thanks, Sheila.

Operator

The next question is from Krishna Sinha of Vertical Research Partners. Please go ahead.

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi, thanks. Real quick, what were the advanced payments that you guys booked this quarter, like can you size those for us?

Roger A. Krone -- Chairman and Chief Executive Officer

Well, I would call over a couple hundred million dollars, and the beauty of that you've heard us talk about those in other parts of our business -- various parts of our business. And we -- as soon as we think about them are kind of moving back off the balance sheet, we get another advance payment from a different customer. So these particularly run in the health part of our business, and they're going to run and stay on the balance sheet, roughly half of them will be on the balance sheet still at the end of the year. So it really helps us move the needle on -- it does help us move the needle on our non-cash working capital deployment. We were thinking of those in our full year guidance, and it just happened earlier in the year than we expected them to.

Krishna Sinha -- Vertical Research Partners -- Analyst

Got you. And then on the top line, you guys had previously talked about kind of a back-half weighted top line acceleration this year. This quarter, obviously, was much better than expected. So can you just talk about what the cadence is throughout the rest of the year now? Is it still more back half-weighted, or should we see a little bit more level loading of revenue growth throughout the year to hit that 5% kind of growth target?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, the way we had thought about this before is that it was going to be dependent upon hiring that we expected to be somewhat delayed until the second quarter. Our hiring results starting early in this quarter really the back end of Q4 last year enabled us to pull some revenue in from the back end of the year and bring it forward. So that it makes the hockey stick, not so much a hockey stick. And so we've got the backlog there. We now have the people to execute on it. And it gives us like we've said more confidence in our guided targets on the top line.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes, and Krishna, I would also add, we were recovered from shutdown, perhaps better in first quarter than we anticipated when we put our full year guidance out and close the year. We were just literally a couple weeks out of the shutdown and the customers were good about getting our people back to work. And so, we were able to better balance the four quarters.

Krishna Sinha -- Vertical Research Partners -- Analyst

Great. And then, finally on headcount, you mentioned sort of a headcount goal to hit your growth numbers this year. First, that 2,000 heads that you hired this quarter, is that a net number? So does that include any attrition that you had? And then, secondly, how are you trending now in terms of headcount growth to hit that 5% growth number? I mean, I guess, how many more additional heads will you have to hire from here to hit that number for the full year?

Roger A. Krone -- Chairman and Chief Executive Officer

Well, the 2,000 is a gross number, and it covers the need to hire people for programs that are growing, but also to cover our attrition. And think of the net number is being over 600. It puts us on a pace to hire the number that we need to execute on our top line growth expectations. We don't guide to headcount numbers, but think about the total number will need will be hiring at the same pace we did in Q1.

Krishna Sinha -- Vertical Research Partners -- Analyst

Got you. That's great. I'll jump back in the queue. Thanks guys.

James C. Reagan -- Chief Financial Officer and Executive Vice President

All right. Thanks, Krishna.

Operator

The next question comes from Noah Poponak of Goldman Sachs. Please go ahead.

Gavin Parsons -- Goldman Sachs -- Analyst

Hey, this is Gavin on for Noah. Good morning, everyone.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes, Ho Gavin, good morning.

Gavin Parsons -- Goldman Sachs -- Analyst

Maybe just a quick follow-on on the headcount question. What kind of growth leverage can you get over and above the percentage growth rate of headcount?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Gavin, if I understand your question correctly, it is the way I think about the way you're asking it is, when we're adding these level of people to help us manage direct programs, and these are either people who are direct on program fully billable. Do we need to add any overheads commensurate with that, the notion that we've had since we combined with IS and GS is once we get the efficiencies and the synergies, the cost synergies executed, which we have our ability to leverage the business as we grow the top line is really, really strong. So we view the level of overhead -- non-billable overhead to be relatively small. Now with that said, as we grow the top line, it does enable us to absorb more costs in terms of growing the business. So it enables us to spend more on future growth initiatives more R&D, more hire ads and more marketing in BNP dollars.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes, Gavin, I heard maybe a second part to that question, which is how much is our own value added and then how much is material and major suppliers? And although, every contract is different. And we strive to have more and more Leidos content in all of our bids. If you think about our content being maybe normally in the 60%-ish, so that when we hire a person, it's not quite two-to-one on growth, but there is a multiplier effect when we add people, because with that contract comes a material suppliers and other partners. So it's not a one-to-one on people, it's actually better than one-to-one.

Gavin Parsons -- Goldman Sachs -- Analyst

That's really helpful. You talked about the -- you actually sound a pretty positive on the budget, but mentioned your expectations for CR to start next year. Last year, I think you had mentioned, maybe some agencies weren't as willing to spend their actual budget dollars, the actual growth in budget dollars, is the customer more confident in the spending environment? Do you expect the CR to be little bit less disruptive this year than it might typically be?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, probably positive on both of those points, given we actually see a way to maybe a small CR, and then a full budget probably (ph) both on the defense and on the non-defense side that more agencies are looking at, but I'm hopeful we'll see a two-year deal get us on the other side of the presidential elections. So agencies are now starting to spend and they're balancing the near-term readiness versus long-term spend. And of course, the President and Congress our meeting on infrastructure. We're probably as we speak and we view that as a net positive.

The CR is always a little bit of dampening, but kind of what we're hearing is, we will probably get a budget and the numbers on the defense side look to be in sort of like the 730s and the non-defense seems to be about 600, low 630s. And with -- if it's a two-year deal with about 3% growth in the out-year for '21. It's one of the better budget environment. So I think that we all have seen in a long time, and if we can lock in a two-year deal and get us through the presidential politics, it really stabilizes the spending from our customers standpoint get as far into '21 and '22.

Gavin Parsons -- Goldman Sachs -- Analyst

Okay, thanks very much.

Operator

The next question comes from Tobey Summer of SunTrust. Please go ahead.

Tobey Summer -- SunTrust Robinson Humphrey -- Analyst

Thank you. From a broad perspective, looking at the company as a whole, how much of the business is now sort of products or services were tethered to an wrapped around the product versus what your multi-year vision maybe for the company?

Roger A. Krone -- Chairman and Chief Executive Officer

Yes. I'll talk a little bit and then Jim, he made out the exact numbers, but let me restate. First and foremost, we tend to be very, very mission aligned. And so, we look at contracts where we go in with a customer we partner in the execution of their agencies mission or even in healthcare. If you think of what we do for Department of Health Affairs, their mission is to provide healthcare to the active military and our opportunity is to team with them and make their electronic healthcare records more efficient. Our products come into play, where they help us to make the mission faster, better or cheaper. And we do like product content, we do reasonable amount of electronic fab, obviously, in our baggage and vehicle inspection programs that we do CBP and TSA, there's more manufacturing content there.

And I know, recently we have said that we are comfortable with products and we are comfortable with what I would call relatively light kind of electronic fab manufacturing. And we would be pleased to see that grow just as a balance in our portfolio, but it's always going to be along the line of helping our customer to achieve a mission. I think there was something that was written, I may have said a week or two ago that's as you know, we don't expect us to be like in the ground vehicle business as a stand-alone product. We make some controls in displays. We make some small communications equipment. Those are the kind of things that we like to do.

Of course, we have this product we call Sea Hunter, which is an autonomous ship, if you think about that that is the Navy surface autonomous mission, and what we really bring to that is the autonomous technology and then to build the ship what we don't actually own a shipyard, we go into the market and try to find an appropriate shipyard and team with them. And if you will use their shipyard for the construction of the ship. And then when we're done, we don't have the shipyard in our portfolio that we have to worry about keeping full. So that's kind of our view of products. I don't know whether Jim wants to add to that or not.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, I think, Roger said it well. If you're thinking about today how much of our revenue is driven by strict manufacturing is relatively small. And when we talk about our comfort level with being more into manufacturing, it's typically like Roger said, light manufacturing and prototyping. And usually it's in conjunction with services that were performing on customer mission. And this enables us to help more with services and product and hardware integration more than thinking about us having a factory, that's not where we're going.

Tobey Summer -- SunTrust Robinson Humphrey -- Analyst

Sure. As you look at hiring strategically and also just this year, are you hiring a disproportionate modest outside of the DC Metro area? I'm trying to get a sense for mix, because we know that the tight labor market seems to come up with investors from time to time.

Roger A. Krone -- Chairman and Chief Executive Officer

We certainly have an emphasis on that. And we have a software factory, if you will, in Morgantown West, Virginia, we're building another one in Charlottesville. We're doing a significant software now in Denver, Colorado Springs and San Diego. We still have some customers who want our team think of it within 50 miles of their facility and that puts some constraints on where we hire. And so there's always this emphasis in the national capital region.

But we are seeing, I won't call it a seachange, but we are seeing more flexibility on behalf of customers for us to move the work to where we can hire people, and of course the biggest example of that is one of our larger customers, the National Geospatial Agency is actually building a -- I wouldn't call it a second headquarters, but a second large facility in St. Louis, Missouri. And of course, St. Louis is a terrific place to hire people. There is some great schools there and they're actually building what's called NGA West in the Downtown area, where a lot of millennials and people want to live. And then as they build that facility, obviously, we have a significant presence in St. Louis today, we've a really great team there. And we will bet, we will be adding to that team and what we hope to do is to hire locally from St. Louis University and (inaudible) other schools in that region.

Tobey Summer -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes.

Operator

The next question comes from Joe DeNardi of Stifel. Please go ahead.

Jonathan Ladewig -- Stifel Nicolaus -- Analyst

Hey, guys, this is Jon on for Joe. Good quarter. I was hoping you could talk about the awards environment both on the Defense and Civil sides. And along that lines kind of how we should think about the cadence of for civilian for the next two quarters?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Let me answer what I think you're asking -- feel free to follow-up with a clarification. Let me start with the last question. On civil, we were on track for some relatively significant awards. And then Civil was most impacted by the shutdown. And I can't speak to how disruptive the shutdown is on our customer. And things that might have been in the pipeline and on track, the shutdown may have only been a couple of weeks, but it's a start-stop and that delays and frankly by quarters some of the civil awards. And so we will see some things move to the right in Civil.

That being said, if I were to characterize the overall environment, we are seeing our customers getting things through the pipeline. And we've got normally 18 months until we have the same administration or different administration. So I think a lot of our customers are going, we need to get this stuff out under contract and started before we have a potential change at administration. And as a result, we're seeing a lot of this stuff now start to come through. There's I think efficiency initiatives almost across the board and trying to think of new ways, what we call other transaction agreements 804s, 845s, 809s, and how to get things under contract. So the environment writ large is a positive one with a little bit of a delay in Civil because of the shutdown.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes. The other thing I would say about the Civil, remember that we're pleased to have been awarded NASA NEST program, looking forward to the get their resolution of that protest. And with that, we'll see -- we're expecting to post a pretty nice book-to-bill and revenue number, revenue growth opportunity in the Civil business, and looking forward to getting the decision sometime late this year on Hanford.

Jonathan Ladewig -- Stifel Nicolaus -- Analyst

Okay. Thanks for the color, guys. Just one last question. On M&A, you're seeing some new entrants, the latest one being Jacobs, and it's a reason to bid for KW (ph). Does this change your approach to M&A? And does it change your approach to looking at the industry overall and perhaps expanding into adjacent markets? Thank you.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Let's see. First of all, I think we have seen -- we and the industry has seen Jacobs broaden and diversify their portfolio. So I don't see whether it's Jacobs or KBR or ECOM. I don't see that is a change, I think it is a trend. And honestly, it really speaks to the excitement around our strategy, we like where we're, we're not surprised that others want to be here. And we think it's an attractive market, it's got (inaudible) both long-term positive aspects for top line and bottom line. It doesn't change the way we think about M&A. We were very fortunate and able to get our deal done about three years ago. We're fully integrated on that.

We now think about our Company and our markets as where do we want to be; what supports our strategy; we want to be thoughtful and careful and the moves that we make; we're always looking for intrinsic value. But we have used the word M&A more so recently than we had maybe two years ago when we were heading (ph) into integration. And if we find something that enhances our strategy and provides capability or access to our customer that we don't have, then clearly we have the balance sheet to be able to play. But that being said, we're going to be thoughtful and look for properties that are important to us and that meet our long-term strategy.

Operator

The next question comes from Justin Donati of Wells Fargo Securities. Please go ahead.

Justin Donati -- Wells Fargo Securities -- Analyst

Hi, this is Justin on for Ed. Thank you for taking my questions. The first one I had, can you talk a little bit about contract mix. If you were able to grow fixed price a little bit faster than cost plus or time and materials this quarter and kind of over the last 12 months?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes. This is Jim. Justin, right now the mix between cost plus and fixed is relatively consistent with what we saw last year in 2018. It's probably actually the fixed price and T&M pieces, maybe dropped by a percentage point, which we don't think of that as being material and that move -- can move around a little bit through the year. So right now, we like to be able to shape new opportunities to be more outcome based, which we believe is good for customers, it's good for the company and gives us an opportunity to expand margins, but moving that needle isn't something that goes really fast in this business. So I think that right now you can think of us as having the same mix going forward just at least in 2019.

Justin Donati -- Wells Fargo Securities -- Analyst

Okay. And kind of jumping on just a few of the questions have been asked earlier. But are you seeing all of your clients kind of spending to their full appropriations levels,? Or in the federals segment are some clients kind of holding back on some of that spend?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, I'm not sure I would say holding back. I think some organizations are just more efficient and faster at turning authorizations in appropriations into procurements and others are slower. The Pentagon is a fairly mature organization in getting things purchased and their emphasis that we've seen out of Secretary Shanahan and the acquisition execs in the services is to accelerate that. And some of the work on other transactions authorities and moving fast have really come from the three services, which now have acquisition authority. And so we've seen encouragement there. As we go around all the other agencies, FAA, NASA, Department of Energy, it's a mixed bag as to how fast they're moving. But there is -- nothing that is slower, right. So I think all the agencies are trying to move faster, some are just better at it than others.

Justin Donati -- Wells Fargo Securities -- Analyst

Great. I appreciate the color. And then just the last one for me. Now that the commercial cyber sale is done. Can you provide any kind of color on how much of the headwind that's going to be for you year-over-year?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, you can think of it on a full year basis or full-year run rate basis is roughly a point of growth.

Justin Donati -- Wells Fargo Securities -- Analyst

Great, thank you.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Okay.

Operator

The next question comes from Rob Spingarn of Credit Suisse. Please go ahead.

James C. Reagan -- Chief Financial Officer and Executive Vice President

Hey, Hi, Rob.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, I just wanted to come back and ask you about the record level of submits the pipeline. I know you explained at Navy Air Systems some other things are behind this pretty sizable jump from the fourth quarter. But in general, I wanted to see if you have a sense or some context, now that you've closed the merger and we've talked about revenue synergies in the past. How do we think about the bid pipeline expanding from here? Assume it should outgrow the budget. Is that fair?

Roger A. Krone -- Chairman and Chief Executive Officer

Well, for a while, couple of points we made at the merger was, we wanted to use our size and scale to go after larger jobs. And we have done that. And in fact, if we had to choose a $5 million kind of a program with a [1:01:17.0] customer versus their $1.5 billion program. We definitely want to make sure that we are fully pursuing the large multi-billion dollar program. There is a point where we will continue to expand as we grow our top line and we grow our ability to generate new business funds and our marketing dollars. And we're not there yet, but there will be a point where growth in our pipeline will mean to go to adjacencies and agencies that maybe we are not, where we don't have a presence with today. But we're not quite there yet. We're taking this kind of one year at a time and we plot through what are the agencies planning on doing, like the Army is rethinking how they procure IT. And so we're having discussions with the army on what that would look like, that's likely to be multi-billion. And so there's still plenty of pipeline that we can go chase in the addressable markets that we have today.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then just the other question I had was on the headcount. You mentioned that there is operating leverage there. So on net headcount increase, what should we be thinking for the year against your 5.5% or your 5% sales goal?

Roger A. Krone -- Chairman and Chief Executive Officer

And just in terms of headcount increase, I think that you can think of the net-net, we're looking to increase headcount between 5% and 6.5%. That's going to depend a lot on how execution mix goes in terms of the programs that are ramping, and how much of their content is subcontracted versus requiring our own heads.

Robert Spingarn -- Credit Suisse -- Analyst

So could it out grow sales at that level at the high end?

Roger A. Krone -- Chairman and Chief Executive Officer

I think that you probably think of it as being in pace with sales, rather than outgrowing it, because as we've said, there's got to be a little bit of operating leverage at play there, Rob.

Robert Spingarn -- Credit Suisse -- Analyst

Right, right, which is why I figured it would be a lower number than sales growth. Although, I guess the timing of the additions has a lot to do with it as well.

Roger A. Krone -- Chairman and Chief Executive Officer

Yes, as I said, the other part of it is that to the extent that we're able to grow with an increasing share of the revenue content being from Leidos employees as opposed to subcontracted, that could put some upward pressure on headcount number, which for us is a good thing, that enables us to take part of that gross margin and plow (ph) [1:04:03.3] it back into things that will grow the business.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you.

Roger A. Krone -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Krishna Sinha of Vertical Research Partners. Please go ahead.

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi, thanks for taking the follow-up. So just a question on margin trajectory. Obviously, DHMSM some has a pretty large subcontractor component and you can't put fee on fee. So as that ramps during the wave phase. Does that put downward pressure on margins, and if that does then what are you expecting in terms of margins from contribution from your other segments? I mean is that going to trend upwards? Is that your expectation over the next few years as DHMSM ramps up in order to keep you above your sort of 10% adjusted EBITDA margin target (inaudible) [1:04:54.6]?

James C. Reagan -- Chief Financial Officer and Executive Vice President

Yes, no, I understand the question. As DHMSM grows, the margin profile for that program will remain consistent. So we should not be thinking, you should not be thinking of the growth in the DHMSM program is putting downward pressure on margins.

Krishna Sinha -- Vertical Research Partners -- Analyst

I understand that margins for that program will stay the same, but are the margins for that somewhat lower than your overall say corporate margin? And therefore, I'm just throw numbers out there, like let's say it's 9% margin for DHMSM and your bogie for the whole company is 10%. I mean as that grows and becomes a bigger part of everything, how does that not put downward pressure on the rest of the corporate margins?

Robert Spingarn -- Credit Suisse -- Analyst

The answer is no, Krishna, because the margin on the DHMSM program at the operating income level as it grows will be in line with the average for the rest of the company.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay, that's great.

James C. Reagan -- Chief Financial Officer and Executive Vice President

All right. Thank you.

Operator

There are no further questions at this time. I'll now hand the call back over to Kelly Hernandez for closing remarks.

Kelly Hernandez -- Senior Vice President of Investor Relations

Thank you, Brock, and thank you all for joining us today. We look forward to sharing more with you about our businesses and our long-term strategy in a couple of weeks at our Investor Day on May 14th. The event will be webcast live for those of you who cannot join us in person. Thank you again, and have a great day.

Operator

This concludes today's conference. You may now disconnect your lines. Thank you for your participation.

Duration: 58 minutes

Call participants:

Kelly Hernandez -- Senior Vice President of Investor Relations

Roger A. Krone -- Chairman and Chief Executive Officer

James C. Reagan -- Chief Financial Officer and Executive Vice President

Robert Spingarn -- Credit Suisse -- Analyst

Cai von Rumohr -- Cowen and Company, LLC -- Analyst

Shelia Kahyaoglu -- Jefferies -- Analyst

Krishna Sinha -- Vertical Research Partners -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Tobey Summer -- SunTrust Robinson Humphrey -- Analyst

Jonathan Ladewig -- Stifel Nicolaus -- Analyst

Justin Donati -- Wells Fargo Securities -- Analyst

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