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Perspecta Inc. (NYSE:PRSP)
Q1 2021 Earnings Call
Aug 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Perspecta First Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead, sir.

Michael Pici -- Vice President of Investor Relations

Thank you, and welcome, everyone, to our First Quarter Fiscal Year 2021 Earnings Conference Call. Participating on the call today are Mac Curtis, our Chairman and CEO; and John Kavanaugh, our CFO. This call is being webcast on the Investor Relations portion of our website at perspecta.com, where we also have posted the earnings release and financial presentation slides, which supplements our comments today. Turning to slide two of the presentation. Before we begin, please note that during this call, we'll make several forward-looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results. For a full discussion of these risks and uncertainties, please refer to our SEC filings, including our latest Form 10-K. In addition, these statements represent our views as of today, and subsequent events may cause our views to change. Though we may elect to update the forward-looking statements, we specifically disclaim any obligation to do so. Finally, as shown on slide three, we'll discuss some non-GAAP financial measures that we believe provide useful information for investors. The slide presentation for today's call includes reconciliations to the most closely comparable GAAP measures.

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

Mac Curtis -- Chairman and Chief Executive Officer

Thank you, Mike, and thank you all for joining us this afternoon. I'm very pleased with Perspecta's performance in the first quarter of fiscal year 2021, which exceeded expectations on all our key financial metrics. Today, I want to share four key messages. First, I'll provide an update on the steps we've taken during our ongoing transition back to a new normal as a result of the COVID-19, along with some remarks about our corporate culture and foundational principles; second, we'll review the strong start to FY 2021, as demonstrated by our Q1 results; third, we'll outline our continued strong performance from a business development team; and fourth, I'll provide some additional detail on our three-year pipeline. Turning to slide four. First, let me begin by once again expressing our heartfelt sympathy for everyone who's been affected by COVID-19. As a company, our first priority is the health and safety of employees and extended workforce. During this pandemic, the work we perform has been deemed critical infrastructure and essential to national security and we have effectively managed through the disruptions to our business. We've implemented extra precautions to ensure our offices remain open to support mission- and business-critical operations. As we anticipated on the last call, the impacts were felt mainly in our intelligence group. In addition to the revenue and profit impacts, we're starting to see program starts and deal flow delays within the intelligence business. We're monitoring the situation, and at this time, believe that our original estimate of the COVID-19 impact on our business is sufficient, and John will address our outlook in his prepared remarks. As we approach the end of our fiscal first quarter, we've begun our process of transitioning back to the new normal of what we call T2M2.

Our dedicated team has developed a framework to transition safely, and over half of our sites are now operating at less than or equal to 50% occupancy. And this comprehensive framework is designed to support a phased transition strategy and implementation, given the complexities of a geographically distributed workforce and variable state-by-state regulations. We have developed an approach to T2M2 standards that is tailorable per multi-tier guidance. We're taking a state-by-state, site-by-site, program-by-program approach to our transition plans, considering the White House, CDC, federal agency standards, state and local orders and customer direction. These plans include standards for social distancing, physical separation of workspaces, personal health and safety, cleaning and sanitation and other measures. We have also developed Perspecta-specific corporate policy on masks and an approval process for returning to the office. These are being reflected in plans and checklists for every state and site where we do business today. We remain dedicated toward the safety of our employees while continuing to make our commitments to support our customers' mission. Now before we dive into the discussion about our financial results, I want to address a broader topic that is top of mind for every American in light of the recent ongoing protests in response to the tragic death of George Floyd. We created our company purpose and corporate value two years ago when we launched Perspecta. It is not by mistake that respect is the first value on our list of 5. Now they're all important to our success, but respect is the cornerstone of our culture in everything we do here.

It defines how we behave in interactions with each other and our customers and makes us good corporate citizens in our communities. So let me be clear, our Board of Directors and management team stands united in our belief that racism, discrimination, hatred and bigotry have no place in society or in our workplace. We have the obligation and the opportunity to ensure that every Perspecta employee can achieve their full potential by being treated with respect and dignity every day and given equal opportunities in a safe and supportive environment. As a leadership and management team, we will stand for nothing less. Moving to our second key message for you today. We continue to consistently deliver on our growth, margin, earnings per share and cash commitments. Revenue was up slightly year-over-year. Adjusted EBITDA was $167 million and adjusted diluted EPS was $0.47, consistent with our expectation and includes the impact of COVID-19 in the quarter. Free cash flow conversion rate for the quarter is again above our full year target at 134% of adjusted net income. With this strong execution during these challenging times, we're off to a solid start in FY 2021. Third, bookings were strong at $1.2 billion, representing a book-to-bill ratio in the fourth quarter of 1.1 times. This continues a positive streak for us. Our book-to-bill ratio for the trailing 12 months is 1.4 times. I'm very proud to share that 53% of our bookings this quarter represents new business for Perspecta. Excluding NGEN SMIT, our book-to-bill ratio is 1.3 times. And new business represented 53% of that number, and our trailing 12-month book-to-bill ratio is 1.5 times. At the end of the first quarter, our total backlog was $13.5 billion, and our funded backlog in the end of the first quarter was $1.9 billion. Excluding NGEN SMIT, total backlog grew $400 million over the prior quarter. Our business development team continues to perform very well, and I'm excited with some of the key awards we recorded in our Defense and Intelligence segment this quarter.

During the quarter, we received multiple awards on classified systems engineering and integration programs supporting various U.S. government customers. The total potential contract value of these awards is $370 million with the period of performance of up to eight years. Perspecta Labs was awarded a DARPA Prom contract for Fast Network Interface Cards, FastNIC cards, is the name of the program. The objective of the FastNICs program is to speed up complex computing applications such as the distributed training of machine learning classifiers and video analysis applications by 100 times through the development, implementation, integration and validation of innovative networking approaches. Perspecta Labs will research, design, develop and demonstrate new network interface hardware that operates at 10 terabits per second speed, and the associated system and programming software to manage and utilize this new hardware. These machine learning applications being developed have broad potential for further deployment across the Department of Defense and other government agencies. And this award represents new work for the company, has a total ceiling value of $37 million and a four-year period of performance. In our Civilian and Health segment, we were awarded a U.S. Department of Homeland Security new data center to support services contract. We will provide the HS headquarters and all authorized components with full scope managed services, including baseline, data center hosting and engineering services as well as application and system migration, planning and execution support.

The definite delivery and definite quantity fixed-price contract is a two-year base with two six-month option periods and a ceiling value of $112 million. We were also selected to continue supporting the Federal Student Aid Customer Contact Center. Under this program, we handle inbound inquiries from students, parents, schools and other stakeholders, addressing issues related to the student aid application process. And these interactions are handled via voice, web chat and mail and is a great example of Perspecta applying technology and people to support a key mission of the Department of Education. This fixed-price contract is a base year one-year option and three additional four-month options for a total period of performance of three years and a total value of $98 million. Looking ahead, our three-year qualified pipeline remains robust at $75 billion, including $13 billion of proposals already submitted and awaiting decision, which is heavily weighted toward new business. Now I want to walk you through our pipeline, providing you some insight into the makeup of opportunities, how they fuel our growth, the type of opportunities, how they align with our corporate strategy and how these opportunities drive and support our margin profile. And finally, to highlight two new senior leaders who have recently joined Perspecta. As we've stated previously, our pipeline continues to be dominated by new work. We've been through a heavy recompete cycle and now have a much lower recompete risk, which will enable us to focus on these new business opportunities to drive organic revenue growth. Our pipeline has a significant amount of enterprise IT programs driving transformation across the DoD, intelligence community and civilian markets. Now the market has shifted, and we're now seeing customers looking to secure capabilities at the enterprise level under a managed services or agile development construct.

At this level, IT is not seen as a commodity rather as the key enabler of the mission. When we use the term enterprise IT, the objectives really encompass hybrid cloud to the end mobile device and everything in between. It means application modernization and implementation to transform mission and business functions. These programs are usually procured via a firm fixed-price contract, and our lineage and core competencies are fully allowed to support these objectives and buying habits. As such, our pipeline continues to be dominated by this deal profile and approximately 55% of the pipeline is firm fixed price. Now I want to focus on a program win for Q1 that highlights this environment. We were selected for the development and deployment of the enterprise Army Training Information Systems. Under this program of record, we will integrate and implement COTS and GOTS technology to drive transformation of the army training environment. Specifically, we will develop, integrate, deliver, operate and maintain an armywide system. Our solution will consolidate 28 legacy systems, implement proven processes and migrate data into a single entry, integrated cloud-based system. This will provide the army with a real-time understanding of combat readiness with reduced cost and complexity. We will drive cost savings through the retirement of duplicative legacy systems. We will drive increased user experience by providing single point of entry to accessing and completing individual training records. And finally, we will provide a common operational picture which will enable army leadership to better understand direct and assess training for both the entire army both uniform and civilian personnel. This is a true transformation effort that we will do under a firm fixed-price contract, which represents new work for the company, has a ceiling value of $237 million. The attributes of ATS are what we see across the customer set, and this market is looking to reduce spending on legacy systems, leverage agile concepts and cloud technology and allowing IT partners like Perspecta to deliver capabilities under firm fixed-price contracts. The government does not see these programs as a commodity.

They see these as a real enabler of mission and business outcomes and they're favoring value when they pick their partners. The market trends and customer buying habits within our pipeline dovetail perfectly with our offerings and solutions. Combined with limited recompete risk, this favorable makeup provides a foundation for and drives our confidence in our strategy. And finally, I'm pleased to announce two new members of our executive leadership team this quarter: Jennifer Swindell and Damian DiPippa. Jennifer has joined us as Senior Vice President and General Manager of the Risk Decision Group. She has a 20-plus year track record of creating high-performing, geographically distributed leadership teams, growing service lines of business and helping organizations to institute process and structures to successfully drive and manage rapid growth. Her background aligns directly to the growth objectives and strategy for RDG and to further our Trusted Workforce 2.0 initiatives. Second, Damian DiPippa has joined us as Senior Vice President and General Manager of the Intelligence Group. Damian has held similar executive positions with peer companies and has 25 years in the national security sector. He has extensive experience in growth areas of mission IT and analytics services within the intelligence community and will help enhance our strong foundation of system engineering business to grow our presence in these growth areas. These hires demonstrate our ability to track top talent across all levels of the organization. And we're confident that the entire leadership team has experience and expertise to execute the strategy we find. In summary, I am proud of the performance that our employees delivered this quarter. Our ability to support our customers' mission now and in the future, are offering solutions that play to our strengths to drive value and innovation.

With that, let me turn the call over to John.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Thanks, Mac, and good afternoon, everyone. I am very pleased with our first quarter performance as we continue our quarterly trend of solid execution. Turning to slide five. Revenue for the quarter was $1.11 billion, which was up slightly from the first quarter of fiscal year 2020 and up 1% sequentially. The results this quarter include a $23 million COVID impact. Revenue growth excluding COVID was up 2% year-over-year and up 3% sequentially. In Q1, we also recognized approximately $14 million in revenue pulled forward from Q2 related to accelerated customer request on NGEN SMIT. Consistent with our disclosure from the last two quarters, we are also providing our results excluding the impact of NGEN SMIT. Revenue, excluding NGEN SMIT, was $894 million, which was, as expected, down 2% year-over-year and 1% sequentially. Excluding the COVID impact, revenue was up 1% year-over-year and up 2% sequentially. The Defense and Intelligence segment revenue increased 3% year-over-year, primarily driven by continued on-contract growth and new program contributions, offset by COVID impacts and higher prior surge volumes related to background investigations. The Civilian and Health care segment revenue decreased 6% year-over-year, mainly due to NASA and other legacy program wind downs, partially offset by continued ramp-up on key new programs. As a result of the momentum from new business wins over the past several quarters, we anticipate a return to growth in this segment in the second half of FY 2021. Overall, our contract mix was a little heavier in terms of cost-plus in the quarter.

As a percentage of total revenue, 52% was fixed price, 34% cost-plus, and 14% time and materials. Q1 adjusted EBITDA was $167 million and adjusted EBITDA margin was 15.1%. The anticipated year-over-year decline in adjusted EBITDA margin was primarily due to lower asset intensity and increased mix of cost-plus programs and an $8 million COVID impact. Excluding the COVID impact, adjusted EBITDA margin was 15.5%. Excluding NGEN SMIT, adjusted EBITDA was $144 million and adjusted EBITDA margin was 16.1%. Depreciation for the quarter declined $18 million from the prior year to $35 million. Acquisition-related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS, was $61 million. Q1 adjusted net income was $76 million, resulting in adjusted diluted earnings per share of $0.47 against a diluted share count of $161.7 million. Adjusted diluted EPS includes a $0.04 impact from COVID. Excluding NGEN SMIT, adjusted diluted earnings per share was $0.37. Turning to slide six. During the first quarter, we generated $132 million of cash flow from operating activities and $102 million of adjusted free cash flow or 134% of adjusted net income. The difference between the cash metrics is $43 million of capital expenditures, which include financial lease payments, and $13 million of separation, integration and restructuring payments. During the first quarter, we permanently paid down $26 million of debt, and we also repaid $50 million of our revolver borrowings. We now have 100% of our $750 million revolver capacity available. Additionally, we returned $10 million to shareholders in the form of quarterly dividends. Given the COVID environment, we temporarily halted share repurchases during the quarter. We exited the quarter with $872 million of total liquidity, including $122 million of cash and $750 million of available revolver capacity. At quarter end, we had $2.5 billion of debt, of which $2.3 billion is flexible, prepayable, with no refinancing and limited repayment requirements over the next several years. Our ending net leverage ratio was 3.2 times per our credit agreement compared to our financial covenant maximum of 4.5 times. In summary, we maintain a solid balance sheet, substantial liquidity and strong financial flexibility.

Turning to slide seven. We're off to a strong start to FY 2021 and are reaffirming our FY 2021 guidance. We expect revenue for the year to be $4.26 billion to $4.41 billion, adjusted EBITDA margin of 15% to 16%, adjusted diluted earnings per share of $1.90 to $2.03 and adjusted free cash flow conversion of 100% plus of adjusted net income. Excluding the estimated impact of NGEN, we expect revenue for the year to be $3.66 billion to $3.81 billion, adjusted EBITDA margin of 15.5% to 16.5%, adjusted diluted earnings per share of $1.60 to $1.73, and adjusted free cash flow conversion of 100% plus. Implicit in our guidance is a COVID impact of $75 million in revenue and $20 million in adjusted EBITDA and an effective tax rate of 25% as we continue to drive tax planning initiatives. Excluding NGEN SMIT, we continue to anticipate year-over-year revenue growth during FY 2021. In conclusion, we're off to a strong start in FY 2021, and we are confident that we are building a solid foundation for achieving both our short- and long-term targets.

Operator, we are now ready to take any questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question today will come from Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardi -- Stifel -- Analyst

Yeah, good evening everybody. Mac, you talked about the strong order activity in the quarter and the bookings are kind of evidence of that. But you also talked about kind of delays on the intel side of the business. So were you able to put up the strong bookings quarter despite softness from the intel customer? Or were they kind of also strong in the quarter?

Mac Curtis -- Chairman and Chief Executive Officer

Yes. No, Joe. This is Mac. Yes, it's a good question. So this is predominantly outside of the one award we had that we talked about in the intel community, we have seen that slowdown. We've seen not only the dialogue, the RFPs, any conversation about moving to awards has slowed down precipitously. So the bookings that we've had were predominantly and really in the other segments, mainly defense, civilian and health primarily.

Joseph DeNardi -- Stifel -- Analyst

Got it. That's helpful. And then, John, just in terms of the cadence of revenue through the year ex NGEN, I mean, should the expectation be that the first half of the year is under pressure just based on the background investigations, but then the back half should be I mean, you'll be growing double digits in the back half of the year ex NGEN. Is that right?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes, Joe, thanks for the question. So as you pointed out, when you kind of take a look at Q2, right, obviously, as you're well aware, we've got some material year-over-year headwinds. You know what, obviously, we did a year ago with NASA, with the asset sale, the BI volume surge that were obviously successfully addressed, and then we had a $14 million pull forward. So excluding NGEN SMIT, we're certainly going to be returning to very strong growth in the back half of the year. I'll just also comment, we are very pleased with the strong performance and the continued momentum and what we're doing in this in the business development arena. So but that's how you should be taking a look at kind of the rest of the year.

Joseph DeNardi -- Stifel -- Analyst

That's helpful. And if I could just sneak one more in, Mac. Just on the acquisition DPHC, it's probably a huge contributor to sales, but a few points. But when you look at what that offers, does that increase what you can bid on going forward? Or does it increase the likelihood that you can win what you were planning to bid?

Mac Curtis -- Chairman and Chief Executive Officer

I think, Joe, it's a couple of things when you look at a deal like that, and I'll start from the top. It puts us in kind of in a new market set, where we do a lot of applied research and cybersecurity and innovations. And so one of the things is and also the contract we won in the defense group with our cyber. So we are absolutely a cyber company from applied research. Now what this helps us do, this extends our ability to help the government protect and integrate sensor systems, electronic warfare with cybersecurity. And the army is certainly a leader in that from a weapon systems perspective. We see this manifesting itself into the air force as well as into the navy. So this extends our ability from doing applied research to the engineering side to actually driving innovation and actually providing limited solutions to the war fighter in terms of electronic warfare sensors. And we see that again, propagating itself throughout the defense establishment. So that's what it does. And it's a they're a strong player in the arms. We're really excited about leveraging that business in the defense group as well as Perspecta Labs.

Operator

The next question comes from Gautam Khanna with Cowen. Please go ahead.

So had and grab your line is muted on your end. Your line is open. And we're still unable to hear you.

We'll move on to our next question. [Operator Instructions] And our next question will come from Gavin Parsons with Goldman Sachs. Please go ahead.

Gavin Parsons -- Goldman Sachs -- Analyst

Good afternoon. Mac, you mentioned the pipeline is 55% fixed price. And I think that's consistent with your revenue mix today or maybe even a little bit better. I thought part of the long-term margin guidance revision was that you were anticipating some mix pressure. So is that 55% fixed price also true of your backlog today? And is that potential upside to the 15% to 16% guide?

Mac Curtis -- Chairman and Chief Executive Officer

Yes. I think when you look at the pipeline, just to make sure it's not all empirical plumbing. And we're looking at the pipe, $75 billion pipeline for the next three years. We look at that to make sure we've got the right mix. It doesn't necessarily mean, Gavin, that we'll bid all 55%, but we have that opportunity. And it's cyclical, right? If you go back a couple of quarters and we had about $1 billion worth of opportunities that we won new customers, as you recall, state, labor and U.S. Senate, it will cost plus. Now this quarter, we had roughly $0.5 billion that were all firm fixed price. So I think it's kind of a guidepost to look at it. So it's not empirical data, but we do see opportunity. And it's all about the guidance we've provided with regards to the go-forward between 15% to 16%.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes. Yes.

Gavin Parsons -- Goldman Sachs -- Analyst

Great. That's helpful. And then I thought you made a really interesting comment that the customer is placing more value on IT and seeing it as a key enabler of mission. How has that changed kind of relative to the last time we saw budget cuts? And then do you think that could insulate IT better than if we have budget cuts, if that could insulate IT better than we saw last time around?

Mac Curtis -- Chairman and Chief Executive Officer

Well, I think one of the things that we want to make sure that there's a difference in it. And the way comments are making it different than what we used to call kind of the enterprise, the ITO, right, the IT outsourcing, where it was managed services from the desktop and those kinds of things. That's a little different than what we're talking about here. What we're talking about here is a real transformation you have and where you're going from this client server environment to cloud computing. When you're cloud computing, you also have to have application transformation. And you have to have everything associated with it. So they're looking at that as more of a holistic transformation going forward. So it is critical that you have to run the operation, why you're doing this transformation and an army contract is a perfect example. So the customer is looking at and saying, "Hey, oh, by the way, I don't necessarily want to own all these assets because we're operating in the cloud, I'm looking for you to come in and help me put a road map together to go from where I am, and it could be on-prem, off-prem data center, client server to get me to a hybrid public or private cloud."

So it's a little more complicated than just the old IT outsourcing that everybody is used to. It really kind of it's kind of an asymptotic change in the way that and they're looking at this as a real value add. It's not about buying laptops and desktops and just putting them in place. This is a real journey with the customers. And you think about customers like Homeland Security, who've got thousands of applications. So you don't go from an on-prem, off-prem data center overnight to a cloud. There's a lot that happens in between. So it is very complex, it takes a lot of enterprise architecture and a capability set and then getting them to the operation. So the whole point of that is that's really in our sweet spot. There's a lot of that work that is firm fixed price and that was the point. So you've got exactly the right point we wanted to lay out there is that we've got a lot of opportunities in the pipeline that are like that, that are big, that are 5, 6, seven years, that are multi-hundred million dollar opportunities. So you're thinking about it the right way, but it is not a commodity because you've got the front end architecture, the consulting, the right cloud, the application migration, all the way to the operating environment. Is that helpful? So it's a long haul, and it's very complicated, takes a lot of capability set to be able to do that.

Gavin Parsons -- Goldman Sachs -- Analyst

Yes. That's really interesting. I mean, would you say we're kind of at the early innings or kind of starting up a bow wave of that? Or where are we kind of in terms of government...

Mac Curtis -- Chairman and Chief Executive Officer

I think with the game that started about a year ago, Gavin, when you think about some of these as-a-service deals, when you think about what the army is doing as a service, air force is doing as a service, when you talk about just enclave opportunity, these are all these kind of real heavy lift kind of architecture to operations transformations across kind of a cloud environment. So yes, we're pretty excited about it. And having the right skill sets to be able to do that and the right past performance is really important.

Gavin Parsons -- Goldman Sachs -- Analyst

Great, thank you.

Operator

[Operator Instructions] Our next question is Gautam Khanna with Cowen. Please go ahead.

Gautam Khanna -- Cowen -- Analyst

Hi. Forgive me if I missed it, my call dropped, but I was wondering if you could talk a little bit about the September and December quarters and what your expectations are for contract adjudications. Maybe talk a little bit about the outstanding pipeline of outstanding bids and what you're seeing in terms of pace of awards? And then I have a follow-up.

Mac Curtis -- Chairman and Chief Executive Officer

Yes. Okay. So I'll start, and John may have something to add. This is Mac. So I think this the COVID impact, I think everybody all the companies did it in the report, you kind of see what's going on there. Historically, this quarter is a big quarter, particularly for software buys and hardware buys. So I think we're seeing how that will manifest itself in this quarter. I do think when we look at it from the Perspecta view, we've got about $13 billion of opportunities that are pending award. Now we certainly won't see all of those in the next two months, and we won't see them over the next three months, but there's a lot of opportunities that we're looking for with regards to adjudication. I also do think, as you start to get back online with some of the intelligence community organizations, they've got a pace that they're going to have to keep to get a lot of things that when they weren't working, they couldn't get in the building, that are kind of a little slow. And I made that comment earlier, Gautam, with regards to the book-to-bill we've had this quarter has been a there was one deal that was intel that was awarded a little earlier in the quarter, but a lot of the intel stuff is a little slow just because they haven't been able to get to work. So I think the end of the government fiscal year, that should be pretty good. And it's hard to predict what happens in December with election in the middle, but there's a lot being backed up. There's a lot being backed up. A lot of awards that have to happen, a lot of contract extensions that have to get done, just to keep things moving.

Gautam Khanna -- Cowen -- Analyst

Okay. That's helpful. And then, I mean, as a follow-up to that is, do you guys have any rough sense of the $13 billion and how it shakes between the intelligence agencies and other, everyone else? Is it same to intel or...

Mac Curtis -- Chairman and Chief Executive Officer

I would I can't give you a percentage, Gautam. They are some pretty decent-sized deals. They're probably three or four that are in there that over the course of time may have gotten awarded this quarter that we expect either in the third quarter or the fourth quarter of the calendar year, but it's pretty typical with regards to the size of the business and the backlog. John, anything to comment?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

No. That's correct.

Gautam Khanna -- Cowen -- Analyst

Okay. And then I was also curious and again, forgive me if you've addressed it, on SMIT, just given the GAO ruling a month ago and the continuing protest, how long does it take to transition off that if you don't prevail? Because I know you have revenues in there, it looks like through December, but I believe it was a nine-month transition. And I'm just curious, is that already winding down? Or is it sort of going to extend beyond December 31, even if you don't retain it?

Mac Curtis -- Chairman and Chief Executive Officer

Yes. Well, let me give you just what I can do is kind of give you chapter and verse of what happens, Gautam, which will answer your question with regards to the protest. So we did post-GAO, we did file with the quarter federal claims, and we didn't take that lightly. And so what that means is, as you know, we're giving all the clarity we possibly can every quarter on what this business looks like without SMIT because I think there's a great story there as well as what it looks like to SMIT so you can separate it out. So we are continuing right now, Gautam, to operate the contract. We are under contract, as we said, through the end of December of this year. Now it's public that the Navy came out and said, they want to basically have they have to put a contract out for our discussion that would extend this contract from the first of the year through June. So it's a six-month contract extension and three one-month options after that. So that was what the navy put out, and I can't go any more discussion about that because we will work that through with the navy. So I guess the point is that if this happens, which we believe it will, that it's feasible that we've got a contract through the end of June, and if the navy decides three one-month options, so it could be August to July, August-September. So I can't comment any more on that because I just don't know any more about it. So John, is that...

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes, I think that's exactly right. And certainly, as Mac laid out, our guidance includes through December because that's what we're contractually obligated for. And we'll as we obviously finalize details with the navy, we'll update appropriately the impacts moving forward, Gautam.

Gautam Khanna -- Cowen -- Analyst

Okay. And one last one. I'm just curious if you could talk a little bit about the M&A pipeline. Is there anything of is it interesting? Are you seeing good properties? Are the multiples too high? Just trying to think about how we should think about cash deployment over the next year or so.

Mac Curtis -- Chairman and Chief Executive Officer

Yes. So John, you want to talk about capital allocation, keep it brief, and I'll give you kind of what we see, Gautam, from the M&A side.

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Sure. Sure. So overall, as I kind of laid out in my prepared remarks, we feel very good about our liquidity, our very strong financial flexibility. So relative to capital allocation, right now, again, we continue to approach it very balanced. We're certainly reinvesting in the business to accelerate organic growth. We'll continue to deleverage the balance sheet. And we are returning capital to shareholders, obviously, with our dividend payment. We did temporarily halt share repurchases given the COVID environment but it's certainly part of our, obviously, longer-term capital allocation. And then as we've said from day 1, we're continuing to look at strategic acquisitions. We're looking at, obviously, continuing to enhance capabilities, customer access. So we run at a rigorous cadence there. So we feel very good about, again, our position right now, our flexibility, our net leverage right now is three.two times. So we feel very well-positioned here with good firepower.

Mac Curtis -- Chairman and Chief Executive Officer

And so Gautam, I do think through the last 60 or 90 days, some deals are getting done. But it has slowed precipitously. So I do think there will be demand. And I think the supply has been a little slow. I think you'll start to see that pick up. I mean the obvious question people in their mind is, is there going to be a CR, what about the CARES 3610 extension, what's in our market space is really important. So I think once those get cleared up a little bit, right? I think you'll start to see it start to pick up because I do think there's kind of money building up on the sidelines. I think there's an appetite, it's we just need to see people just need to put their properties on the market. It's like the housing market, right? Just there's not enough properties out there. So I do hope it will pick up we see what are we seeing? Some, but probably not really what we'd like to see. And hopefully, in the next 60 to 90 days, we'll see a pick up. But it's been pretty slow.

Gautam Khanna -- Cowen -- Analyst

Thank you very much guys. Got some prior safely.

Mac Curtis -- Chairman and Chief Executive Officer

Yeah.

Operator

And our next question is a follow-up from Gavin Parsons with Goldman Sachs. Please go ahead.

Gavin Parsons -- Goldman Sachs -- Analyst

All right, thanks guys. John, just wanted to touch on the COVID impact, the $23 million in the quarter relative to the $75 million for the year. It sounded like things are kind of starting to get better here. Any reason to expect that, that $23 million headwind shouldn't start to decline sequentially as we go forward throughout the year?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes. So I would say right now, certainly, situation is fluid. We're obviously closely monitoring it. We'll continue to assess impact on our outlook. Right now, we feel very good with our guidance. All along, we thought the impacts in our business would be more prevalent in the first half of the year. So this is in line with what our thinking was that we communicated on the call last quarter, Gavin.

Gavin Parsons -- Goldman Sachs -- Analyst

Okay. Great. And what were the cash flow impacts, if any, kind of to the quarter or to the year? And then if you had any deferred payroll taxes for the frontline over the next year or two?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Yes, glad you brought that up. We're very, very pleased with our continued very strong free cash flow generation. I think as you know, we have industry-leading conversions and yields, just very solid working capital management. Clearly, we did benefit from the employee payroll tax deferral under the CARES Act provision in the quarter, which was already built in our guidance. We feel really good about where we are. We do a very good job in terms of both billing and very timely collecting. So feel very good about where we're at right now.

Gavin Parsons -- Goldman Sachs -- Analyst

Got it. Okay, thanks very much.

Operator

And the next question is also a follow-up and that's from Joseph DeNardi with Stifel. Please go ahead.

Joseph DeNardi -- Stifel -- Analyst

Yes. Thanks, John, just along the lines of M&A, where do you feel comfortable taking leverage with the transaction?

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Sure. Sure. So again, we ended the quarter at about 3.2 times net leverage per our credit agreement. We'll always continue to be very responsible and disciplined here. Really, our focus is driving our strategy, right? So along those lines, we're continuing to look at adding capabilities, enhancing capabilities, getting obviously further customer access. So again, we would always be taking a look at upper 3s, and I would be comfortable on a temporary basis at four times net leverage per our product agreement. But I'll stress, we'll be very responsible and disciplined here, and we worked this very hard.

Joseph DeNardi -- Stifel -- Analyst

Got it. And then can you just talk about, maybe I missed it, the nature of the COVID impact, where in the business you're seeing it? Is it background investigations? And then is it the expectation that you recover the revenue and EBITDA next year? Or is it more lost than delayed?

Mac Curtis -- Chairman and Chief Executive Officer

Okay. So I'm going to turn it over to John in just a second. But I think at the top level, Joe, again, we've been very fortunate, in the last call we talked about hundreds of people that not thousands but hundreds of people that couldn't get in the billings in the intelligence community. And so that's abated a bit. So we're worked, right? And from the Department of Education, to what we do for Center for Medicare & Medicaid Services, all of that is deemed mission-critical so we're all working. I would tell you, it's probably a couple of hundred people at this point that were going to do a shift work or cannot get into the building. So that started to come down precipitously. So we are working, and that's and we're really, very fortunate in that regard. So and we see that getting about John said about half of our facilities are open and very careful, right, because we're all over the country, are open and probably 1/3 of our workforce, a little bit more than 1/3 of our workforce is kind of in the office, but we're finding all the guidelines. And look, we were one of the first to do temperature scanning in almost all facilities. So we're very careful with it. So from a high level of management perspective, as we talked about in the remarks, that's kind of where we're headed and again, we've got a few other people that are impacted, but that's really it, John, anything...

John Kavanaugh -- Senior Vice President, Chief Financial Officer

No, that's spot on. And the impact that we are seeing is primarily, Joe, in the intel business, as you would suspect, as we've talked about before. But to Mac's point, I think we've worked this very responsibly. We've done a nice job from a remote perspective, and we're handling this very well right now and feel good about, again, the guidance and the numbers that we put out there for you.

Joseph DeNardi -- Stifel -- Analyst

Okay, next quarter. Thank you.

Mac Curtis -- Chairman and Chief Executive Officer

Joe. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Pici for any closing remarks.

Michael Pici -- Vice President of Investor Relations

Thank you. Thank you all for joining us today and for your continued interest in Perspecta, and we look forward to speaking with you again next quarter. Have a good evening.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Michael Pici -- Vice President of Investor Relations

Mac Curtis -- Chairman and Chief Executive Officer

John Kavanaugh -- Senior Vice President, Chief Financial Officer

Joseph DeNardi -- Stifel -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Gautam Khanna -- Cowen -- Analyst

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