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Perspecta Inc. (PRSP) Q3 2019 Earnings Conference Call Transcript

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Perspecta Inc. (NYSE: PRSP)
Q3 2019 Earnings Conference Call
Feb. 13, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Perspecta Third Quarter Fiscal Year 2019 Earnings Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

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

Stuart Davis -- Vice President of Investor Relations and Strategy

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

Turning to slide two of the presentation, please note that during this call, we will make forward-looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results. For a full discussion of these risks and uncertainties, please refer to our SEC filings including our latest Form 10-K.

In addition the statements represent our views as of today and subsequent events may cause our views to change. Though, we may elect to update the forward-looking statements, we specifically disclaim any obligation to do so.

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

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

Mac Curtis -- Chief Executive Officer

Thank you, Stuart and thank you all for joining us on this afternoon's call. On behalf of the entire Perspecta team, I'm pleased to report that we drove strong operational performance in our third quarter. We're on track to meet or exceed all of the metrics that we laid out for this year and we're laying a strong foundation for fiscal year 2020.

I'll provide a little more on our financial performance in the quarter, and then I'll turn to our robust business development results, our Perspecta business strategy, our view of the government marketplace and the shutdown, and an update on integration.

First, we exceeded consensus estimates on all of the key financial metrics. Our results for the third quarter support the financial model. We laid out in Investor Day in May and point toward the upper end of the guidance we gave you on our last earnings call.

Revenue was up slightly year-over-year on a pro forma basis and up 1% sequentially with industry-leading adjusted EBITDA margins of 16.9%, adjusted EBITDA was up 12%, and adjusted diluted EPS was up 12% year-over-year. This performance has been a true team effort starting with our business group general managers, their employees working everyday supporting customer missions and our efficient functional support organizations. As a result of our strong performance year-to-date and our positive outlook for the fourth quarter, we're upwardly revising our fiscal year 2019 guidance for all metrics as John, will describe later.

Second, we had another excellent business development quarter with a book-to-bill ratio well in excess of one times in what has traditionally been the government's slowest awards quarter. Bookings totaled $1.7 billion in the third quarter, representing a book-to-bill ratio of 1.6 times. Year-to-date, book-to-bill was 1.7 times, which gives us a powerful growth trajectory.

Our third quarter business development results reflect our differentiated market position, as we leverage innovation across the entire company to create compelling solutions for our customers and drive important new wins.

With robust bookings we're able to grow our total and funded backlog. At the end of the third quarter, total backlog was $10.4 billion, which was up 3% compared to the second quarter of fiscal year 2019. Funded backlog at the end of the quarter was $2.2 billion, an increase of 12% sequentially. Over the past two quarters, total and funded backlog were up 16% and 13%, respectively. Kudos to Sean Mullen and the entire business development team for demonstrating to our customers the value of Perspecta.

This quarter's awards were well distributed across our customer base, speaking to the health of both our segments. The largest award in the third quarter was eight-month of $485 million NGEN extension, which covers our IT and network security services for the Navy and Marine Corps through May of 2020.

Now this extension is incremental to the one-year, $787 million award in the second quarter of fiscal year 2019. In addition, we had a major recompete win at the Department of Veteran Affairs and extensions of our mission-critical work for several classified customers.

While we zealously pursue our recompetes, we're focused on new business to drive growth and this quarter's results were stellar. Of the third quarter bookings, $600 million or 35% were for new business. About half the new business bookings were in our intelligence community portfolio where we won new consolidation contracts and major contract expansions. On these awards, Perspecta will provide systems integration and engineering as well as software, cyber and agile DevOps solutions.

In addition, the Air Force awarded us a five-year $71 million contract to increase cyber situational awareness from enterprise logging architecture. Also new task force have beginning to flow on U.S. Postal Service, technical support services IDIQ, which we won in the first quarter. The contract focuses on application development, maintenance and modernization; DevOps support information and data engineering, systems integration and testing.

The business development results are particularly rewarding because this is the first quarter where most of the adjudication are based on Perspecta as opposed to legacy proposals. Many of the awards in the quarter simply would not have been possible without the combined capabilities across Perspecta.

The forward outlook for bookings remains strong. Currently we have a robust pipeline of $72 billion worth of qualified opportunities, including $13 billion of proposals already submitted and awaiting a decision. We have relatively few pending opportunities in agencies funded by continuing resolution.

So we are not expecting a material impact whatever the ultimate resolution of the government shutdown. Moreover last week the protest of our United States Army Cyber Command, cyberspace operations support contract was lifted. This is exciting, it is a single award IDIQ with a potential ceiling value of $900 million over five years. This is all new work for Perspecta. The fourth quarter will be another strong one for bookings.

In January, bids were done at NGEN, including service management, infrastructure and transport or SMIT and end-user hardware or EUH. The Navy is expecting to make an award on both contracts by late 2019. As I mentioned, we are currently under contract through May of 2020, and we remain confident of our value proposition to the Navy.

Third, we just completed our first three year strategic plan that fundamentally reaffirms the rationale behind the creation of Perspecta. We will unleash the Power of the Pyramid with an innovation-based culture to drive aggressive growth in the federal market. Our strategic priorities center around cloud and IT transformation, cybersecurity, intelligent tools and analytics to drive mission success, Trusted Workforce and emerging markets.

The foundation for our success in these priorities is the innovation and the applied research-driven solutions and offerings from Perspecta Labs. You can read about some of our cutting-edge cyber research for the Defense Advanced Research Project Agency in November's Wired Magazine.

We've supported DARPA's rapid attack detection isolation and characterization systems for the RADICS the program since 2015. And we were proud to be one of the three cyber companies in a Department of Energy sponsored test of our methodologies and tools to protect and restore the power grid from cyber threats.

Our demonstrated leadership and cyber research absolutely differentiates us from our competitors and was essential to recent competitive wins like our Army Cyber and the Air Force enterprise logging win.

Now we have multiple vectors where we leverage Perspecta Labs and our strategy. We have cutting-edge technologies to stand in the intersection of big data analytics cybersecurity and wireless networking. We've been certified with the National Security Agency to provide CSFC, now that's Commercial Solutions For Classified as a trusted integrator under that program and we're able to apply unique CSFC components and solutions against the real world problems of managing the world's largest Internet at NMCI, to realize breakthrough improvements for our customers in Navy.

We're also leveraging the unique capabilities in cutting-edge cyber research in artificial intelligence and machine learning to win business in new markets. The Distributed, Assured and Dynamic Configuration tool or DADC. This system enables networks to be automatically setup in minutes eliminates configuration errors and proactively changes configurations to confuse any adversary. DADC was a critical differentiator for recent classified customer program win.

Finally, we're leveraging Perspecta Labs technologies to amplify, the partnerships we've established as a major service provider. We're using DADC with Amazon web services to automatically and correctly configure cloud instances in a matter of seconds. Similarly, CSFC complements and expands our enterprise-class network deployments, while we partner with AT&T to deliver capabilities that exceed typical commercial offerings. One outcome of this strategy process is a keen understanding of our entire portfolio and its fits with our strategic priorities. Overall, there's great alignment across our business and any capability gaps are modest. However, as we wind down our integration activities, we will be open to opportunities to strengthen our competitive position and financial outlook.

Fourth, with the extended government shutdown, there's been quite a lot of drama around the market, but no real change to the big picture. The shutdown was not about the size of government spending. The world is not getting any safer, the addressable market remains very large and contractors remain critical to the operation of the federal government.

Our funding streams within the defense and intelligence budgets are secure within most reasonable budget scenarios. The areas of focus for our customers as identified in the National Intelligence Strategy, the National Defense strategy can include Russia, China, and North Korea and our customers in many innovative solutions around cybersecurity, mission-focused artificial intelligence, agile DevOps, and space superiority.

Given the current threat, we anticipate bipartisan support for our defense and intelligence spending. Our focus on mission-essential work positioned us well to thrive even as some of the government operated under shutdown for more than a month.

While unfortunate the shutdown highlighted the importance of government operation beyond national security. The administration, Congress, and the American people realize that without appropriate funding we cannot rely on things such as the safety of our food, air travel, and there are hopeful signs that a new deal will be reached to avoid another extended shutdown.

And finally fifth, integration is proceeding well. We remain on track to realize the $43 million of cost synergies and the $20 million of delivery cost savings in fiscal 2019 that we committed as part of the integration planning.

All of our policies and programs we've taken a Rip off the Band Aid approach and it's working. Last call we talked about the Perspecta incentive compensation programs and open enrollment. When we complete our first fiscal year in March, every employee will also be on the same paid time off program and the same 401(k) program. There will be a one set of job families, career development pass, and personal development plans that apply to all employees. There won't be any more legacy programs for special cases. There will only be One Perspecta and one brand.

Now, the reaction of our people has been very positive and you can see that reflected in the fact that about 45% of our hires in the quarter are from employee referrals. People are buying into the shared culture, shared values, and shared commitment to mission.

Before turning it over to John, I want to address one point of confusion with some investors. Apparently the S-1 we filed in November after the Q2 call to register the very top tiers was taken by some as a sign that Veritas was anxious to sell. On the contrary the S-1 registration was mandated by our original signed agreement with Veritas.

Veritas is a patient holder with no need for immediate liquidity and I don't expect them to be sellers at anywhere near the current stock price. Just so there's no confusion, we will file a Form 424 tomorrow as required by the SEC to update the S-1 for our latest results, but it should not be taken as a requirement or intention for Veritas to sell any shares.

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

John Kavanaugh -- Chief Financial Officer

Thanks Mac and good afternoon everyone. I'm extremely pleased with our third quarter results. With each passing quarter, we're building a track record for investors to understand our business and we're demonstrating our focus on execution. The results are becoming more predictable which enables increasingly more accurate forecast and when we gave a number, we will execute to that number.

Now, I'll go through the key financial results and drivers beginning on Slide 5. In Q2 and Q3, we had full contribution from all three legacy companies. For year-to-date and year-over-year comparison periods, I'll refer to pro forma results which assume the spinoff and mergers occurred at the beginning of fiscal year 2018.

For all periods, I'll also exclude costs directly associated with the spin merger transactions and the ongoing integration process. Our press release and presentation slides provide the reconciliations from pro forma adjusted results to GAAP.

Revenue for the quarter was $1.08 billion, up slightly from the third quarter of fiscal year 2018 and up 1% from the second quarter of fiscal year 2019. Our Defense and Intelligence segment increased 5% year-over-year with strong performance in our Defense and Federal Background Investigations support businesses.

This growth came despite a $14 million rollover challenge from the Q1 contract divestiture and the $13 million revenue pull forward from Q3 to Q2 and a large classified fixed price contract that we referenced on the last call. The growth was in part enabled by $10 million in material purchases in the quarter that will not recur in Q4.

Civilian and Health Care revenue decreased $30 million or 8% year-over-year. $26 million of the revenue decrease was due to the successful completion in December 2017 for large engineering support contract for the Kennedy Space Center.

If you exclude the $26 million NASA roll-off and the $14 million Q1 contract divestiture, our revenue was up 4% year-over-year, which better represents our current revenue trajectory. We've had three straight quarters of year-over-year growth and each quarter of the fiscal year has been up sequentially. We're focused on growth and we're delivering growth.

Q3 adjusted EBITDA was $182 million, which was up 12% compared to year-ago pro forma adjusted EBITDA, as margin improved from 15.2% to 16.9%. Adjusted EBITDA margin was also up 40 basis points sequentially, based primarily on reduced SG&A expenses. We remain on track to meet all of our commitments around merger cost synergies and operational efficiencies.

Contract mix is a key driver of our industry-leading adjusted EBITDA margin. In the third quarter, our mix was basically in line with last quarter. As a percentage of total revenue, our contracts were 56% fixed price, 19% time and materials and 25% cost-plus. Based on what we're bidding and winning, we expect that over the long term contract mix will continue to move in the direction of fixed price.

Depreciation and amortization totaled $76 million in Q3. Included in the D&A is $37 million of acquisition-related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS. We also incurred $17 million of transaction, integration and restructuring expense, which is excluded from all adjusted metrics.

Net interest expense totaled $37 million in Q3, which includes the interest on our term loans and capital leases. In December, we amended our original credit agreement to reduce the interest rates on our $1.9 billion Term Loan A facilities and our $600 million revolving credit facility by 25 basis points and on our unused revolver commitment fee by 5 basis points, with no increase in any borrowing. The interest rate on our Term Loan B facility remains unchanged.

Netting the origination cost with the interest savings is essentially neutral to fiscal year 2019, but in fiscal year 2020 and beyond we'll save about $5 million per year in interest. This savings will help offset the increases in LIBOR rate during calendar 2018 that are expected to sustain through calendar 2020.

Applying our expected long-term effective tax rate of 27%, Q3 adjusted net income was $77 million or $0.47 per share against the diluted share count of 164.5 million. Adjusted diluted earnings per share for the quarter were up 12% year-over-year and also up 4% on a sequential basis.

The government shutdown had no material impact on the income statement based on the mission-essential nature of our work, which limited our exposure and the timing of the shutdown. The shutdown began on December 22nd, so our Q3 exposure was only a few business days during a period of heavy leave taking.

Turning to slide 6. During the third quarter, we generated $57 million of cash flow from operating activities and $33 million of adjusted free cash flow or 43% of adjusted net income. The difference between the cash metrics is the $43 million of capital expenditures, which includes capital lease payments and $19 million of restructuring and integration payments. A relatively high capital intensity is consistent with our high mix of managed services enterprise IT delivery and these assets can lead to higher adjusted EBITDA margins and stickiness with our customers.

Day sales outstanding for the quarter were 59 days within our target DSO range of a mid-to high 50s. While the December quarter is seasonally the weakest for collections there were two additional factors that impacted cash during the quarter. First, the payment processing organization for one of our largest customers was implementing a new system, which slowed collections.

Second, under the terms of our agreement our AR facility was suspended because of the shutdown. As a result, the company was unable to sell new receivables at the end of December. We since collected the payments that were held up in December and we;re able to resume receivable sales for agencies that had funding despite the shutdown.

In the third quarter, we continue to execute our balanced capital deployment plan with the mix of debt paydown, share repurchases and dividends. During the quarter, we paid down $32 million in debt and returned $29 million to shareholders, $8 million in quarterly dividends and $21 million in share repurchases. The share repurchase figure includes less than $1 million for purchases in the quarter that were not settled until after the end of the quarter, and so are not reflected in our third quarter statement of cash flows.

In all, we repurchased 967,000 shares. We ended the quarter with $100 million of cash, $289 million of capital leases, and $2.5 billion of term loan debt. With $600 million of undrawn revolver capacity, our $700 million of total liquidity affords us substantial financial flexibility to manage the business.

Turning to our forward guidance on slide 7. We're revising our fiscal year 2019 guidance to reflect our strong year-to-date financial results and positive forward outlook. We've taken out the bottom end of our previous revenue guidance and increased the top end of the range by $10 million. We expect pro forma revenue for the year to be $4.235 billion to $4.260 billion. We're now guiding pro forma adjusted EBITDA margin of 17.1% to 17.3%, compared to our previous guidance of 16.5% to 17%.

As a result, we now expect pro forma adjusted diluted earnings per share of $1.90 to $1.95, again, taking out the bottom of our previous range of $1.85 to $1.95. Finally, we're raising our guidance for pro forma adjusted free cash flow conversion for fiscal year 2019 from 95% plus to 100% plus of pro forma adjusted net income.

We expect to be at or above the midpoint of guidance for revenue, adjusted EBITDA margin and adjusted EPS. As for cash flow, year-to-date we've generated $283 million of pro forma adjusted free cash flow, which is 117% of our pro forma adjusted net income. Although, the fourth quarter will include higher-than-average tax and payroll outlays, we will benefit from the cash collections that were held up in Q3, and are comfortable with the revised guidance.

Operator, we're now ready to take any questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Joe DeNardi of Stifel.

Jon -- Stifel -- Analyst

Hey, guys. This is Jon for Joe. I guess my first question is about the NASA NEST loss. Could you kind of go into that contract and how we should think about the headwinds of about maybe $250 million and maybe whether or not you guys are going to protest this contract?

Mac Curtis -- Chief Executive Officer

Yes. Jon, this is Mac Curtis. Well, first of all, yes, I'll answer your question. I'm not going to go in a lot of details on the -- I can't, on the current award which happened on Friday because we haven't had our debrief yet. Our debrief is tomorrow so we'll have a little more -- better idea about where we stand with regards to the valuation, the protest, et cetera.

So I can't go in a lot of detail here. But let me kind of give you what I do know and I think it's worth a little bit of background. So for those you who's been around this industry for a while, you'll remember the advent of this thing called seat management, right, and that's really end-user support of the desktop. And so in 2010, the NASA ODIN contract, which was centerwide, headquarterswide, would use an end-user desktop, printer kind of support contract, ended. NASA put out this contract called ACES, which was to provide end-user support, seat management support for the 10 centers plus headquarters.

They awarded that contract and then it's a Lockheed contract. It's Hewlett-Packard who won, as awarded in 2010, protested and finally got started in roughly 2011. So it was awarded at $2.5 billion ceiling, right, and it was for 10 years, similar to this contract. When you think about the 10 centers and headquarters, frankly, the run rate that we had -- it's out there, was $100 million a year, right? So it was $100 million a year, and frankly, for us, it was very low margin. So I would just suggest you think about the new contract as a ceiling. I don't know whether NASA is going get much more budget in this kind of thing, but we were on it for 7 years on $100 million a year run rate at, again, very low margin. So I think what I would look at this as -- it is called an end-user contract, most of the support, so have people at all the 10 centers. It's really -- we call it seat management because it's end-user support.

If someone has a problem with their -- with the laptop, with the mouse, with the end-user devices such as the printer, that's where the support is, more help desk and those kinds of things. It's not back-office network, not that kind of stuff. So I would refer to the end-user support. So again, I think -- you think about this NEST -- the NEST contract, it -- from an RFP that's public information, similarly designed. It's the 10 centers. It's end-user support, probably a better described service level agreement package than I think what the HP team inherited. And again, it's for 10 years. So again, the evaluated price was more in line, frankly, for what we saw on the original contract, OK. So I'm not going to answer whether the protest -- haven't had the debrief, sorely did not have anywhere near the $2.9 billion divided by 10. It was literally about $100 million a year. Does that help?

Jon -- Stifel -- Analyst

Yes, it does, Mac. And then I just want to follow up with one more question. When you think about the shutdown, it has an effect to you in the third quarter of the fiscal year. But looking at fourth quarter, has the shutdown kind of impacted enterprise IT and cloud work and kind of your outlook on awards?

Mac Curtis -- Chief Executive Officer

No, not really. We didn't have much in the pipeline on the way of awards. I'm sure we'll talk about that. It was kind of de minimis. And the way the government looks at it, Jon, is it's frankly deemed as what's mission-essential. And so we -- it was very, very small for us with regards to what was mission-essential. In fact, some of the workforce for the NASA contract, being what was the ACES contract now the NEST contract, was deemed as non-mission-essential. So we had a small number of employees that weren't working as a result of the shutdown. So John, you will talk about the cash or anything?

John Kavanaugh -- Chief Financial Officer

Yes. So again, in Q3, no material impact whatsoever from a P&L. And again, due to, again, the mission-critical essential nature of our work, we don't see any, at all, material impact in Q4, Jon.

Jon -- Stifel -- Analyst

Perfect. Thanks guys. I'll jump back in the queue.

John Kavanaugh -- Chief Financial Officer

Very good.

Operator

The next question comes from Joseph Vafi of Loop Capital.

Joseph Vafi -- Loop Capital. -- Analyst

Hey guys, good afternoon. Steady results, nice to see. First of all, you're kind of a few quarters in here on a spin-merger. Do you have an idea at this point -- if you look at how much you're going to bid this calendar year versus the previous year under the combined or under the predecessor companies? Do you have a feel for how much more you might be bidding on a percentage basis? And then I'll have a follow-up. Thanks.

Mac Curtis -- Chief Executive Officer

Yes. Well, Joe, I think we've kind of done this high-level math of what we need to bid to grow the business based on what we laid out in Investor Day. And so I think we've got kind of the baseline number. I'm not going to go in a lot of detail. It's hard to predict. Look, we have to be opportunistic. We've got some really large deals. If you think about it, Joe, when we look at our $72 billion pipeline, probably -- and that goes from -- for the next 3 years, 2020, 2021, 2022; about 18% to 20% as recompete, the remaining 80% to 82% is new business. That's certainly enough to sustain when we think about it being able to grow the business.

So I'm not sure it's a matter of just the math being to bid more. When you think about what our recompete is, it's really mostly about the quality. So we're ramping it up. I think the dust is settling. We used to talk, Joe, about the third pipeline. These are the deals that came as a result of the 2 companies coming together, where we'll then put (inaudible) capabilities and USPS couldn't bid. Well now, as we've gone through the third quarter and well to the fourth quarter, we don't really talk about the third pipeline because it's all Perspecta pipeline now.

And just to give you just an idea, without the combined -- what we call the pyramid of the companies, there's no way we would have won AR cyber, right? That is the first -- we're in it. The 2 quarters, we were being able to influence some bids and being able to take agile DevOps into a digital transformation deal and vice versa, but this was the first deal that we identified as the combined Perspecta to go after when we would not have won it again without all of Perspecta. So I think we're kind of keen on that and like that idea. So I think we've got enough in the pipeline. We have to grow the business, Joe, and I think we're just trying to make sure that we've got the deals qualified and we've got the right capture teams together to put together the best solutions. I can't give you a percentage but it's a robust pipeline for us to go after, and I think we'll -- we're really now focused on quality and making sure we're putting the best teams together to win.

John Kavanaugh -- Chief Financial Officer

And I think you, Joe, you can look at the kind of the submit -- awaiting decision number from the Q2 call compared to where we are now and see that we submitted a whole lot of bids if you think of $1.7 billion in bookings and even AR cyber is taken out of that $13 billion still awaiting decision. So submit volume definitely picked up, and we're on track to meet the targets there to meet the growth.

Joseph Vafi -- Loop Capital. -- Analyst

Okay, that's helpful. And then on in this Army single award IDIQ, could you provide us a little more color about what the opportunity is there, technology you're deploying and which specific part of the Army you're going to be working with there? Thanks.

John McNamara Curtis -- Chief Executive Officer, President & Director

Yes, yes, Joe, sure. So this is, as you know, the -- under what is up in Fort Meade, they've got the combined -- it's a unified command, the Cyber Command, of which we are a big player up there. So all under the Cyber Command, Joe, you've got the 10th fleet, the 24th air wing, which is the Army -- the Air Force Cyber and now you've got Army Cyber. Each is a part of component of the main branches. So this is to basically help the Army Cyber headquarters set up their whole infrastructure and to work not only with Army Cyber Command headquarters, the joint forces headquarters and all the support and components and partners of the DoD cyber mission. So right now, it's headquartered at Fort Belvoir and Fort Huachuca. The home of Army Cyber is going to be down Fort Gordon, which is right outside Augusta, Georgia. So this has all the proponents dealing with the program management, intelligence support.

It's helping with the systems, information assurance, the comm support. It really is helping them establish the command. And once it's settled, Joe, then we'll really be able to kind of integrate a lot of the innovative tools that we've developed in Perspecta Labs, some of which we're using at the U.S. Army command now. So it's a big contract. It's 5 years. We won it in December. It was protested. The protest was just rescinded. So -- back on Tuesday, and we're just kind of getting started. So it's a great opportunity for us. It's all new work. We were kind of peering into the future arm in arm with the United States Army Cyber Command, and so it's got a lot of our -- we're excited about it.

Joseph Vafi -- Loop Capital. -- Analyst

Great. Thanks, guys.

Operator

And next we have a question from Lucy Guo of Cowen and Company.

Lucy Guo -- Cowen and Company. -- Analyst

Thanks for taking my question. I just have to say the bar has been set higher every quarter. The -- so Mac, I wanted to start with -- maybe just clarify for us on this question of NASA NEST in terms of how much help there may be from any capital leases associated with it rolling off in terms of cash?

John Kavanaugh -- Chief Financial Officer

Okay. So again, we'll see -- we're going to go through the debrief, first of all, coming up this week and we'll be determining again what we're going to do there. That said, it was -- it had a portion of asset intensity based on the nature of the work. It -- I don't see any really material impact here going forward. I really don't want to get into much more now because of the situation we're in, but there'll be more to follow once we determine the approach that we're going to take.

Lucy Guo -- Cowen and Company. -- Analyst

Got it. And also, on your classified bookings, the $390 million new -- what you were calling new business, can you just maybe talk a little bit more about -- or some of those scope increase on existing contracts, any dynamics you can point to there? Separately on classified work, you had a -- in Q2, you had pointed out a pull forward of some work. I believe it was $13 million. Is there any kind of continuation of that going forward or any other contracts that may be one-off? Just wondering if there's any other one-offs in Q4.

Mac Curtis -- Chief Executive Officer

So on the Q3, the new business and the classified, I can't go in a lot of detail but it's high-end work. It's very high-end work and some of it is -- well, most of it is new, new. There is some scope, additional scope in what we call combo contracts, where the customer puts 2 contracts together. On one of them, it's 90% new, 10% redo. So most of it is new, Lucy, when you think about having the $390 million. The vast majority is new, which is exciting for us. In one case -- I can't go in a lot of detail. It's a new customer. It's a new -- it's a customer we've had. It's new work. It's different kind of work that we're doing, but it's high-end kind of the Intel systems, engineering, integration. There's some analysis work. There are some agile DevOps work kind of inside of all that. It's about as far as I can think it. So that's good on the Q3. John, if you can...

John Kavanaugh -- Chief Financial Officer

Yes. And relative to your question, you're correct, Lucy. We did -- in our Q2, pulled forward a $13 million milestone from Q3 into Q4. It was based on a successful early milestone completion. So we did grow over that in the quarter. And obviously, as I had mentioned in my prepared remarks, we had a material pass-through in our defense segment. It was about $10 million that helped us go through it.

Lucy Guo -- Cowen and Company. -- Analyst

Got it, OK. And then also in -- just thinking through kind of the contract mix, what you said about continuation of mix toward fixed price, I thought you had said at some point your backlog has 60% plus fixed price. Can you just maybe clarify whether that's fixed price and kind of material or just fixed price?

John Kavanaugh -- Chief Financial Officer

Sure, sure. Just to level set, when we take a look at today, again, our contract mix is 56% fixed price, 19% time and material and 25% cost-plus. What we were referring to is when we take a look at our robust $72 billion pipeline over the next 3 years, there's north of 60% fixed price content, which is separate from the P&L.

Mac Curtis -- Chief Executive Officer

Right.

Lucy Guo -- Cowen and Company. -- Analyst

Okay, OK. That makes sense. And given that you -- it seemed like you have refreshed your three-year outlook, right? And thinking through this pending transition from the current NGEN to the recomplete, NGEN-R, one question I've been getting is, how does margin on at this fixed-price contract transition as you conclude the current contract and move into the next iteration? Just because for most fixed price contracts there is some variances, right, at the beginning of a new contract.

Mac Curtis -- Chief Executive Officer

Yes. So I think that the way I would suggest you think about it is -- this is through 2020, May of 2020. It's the same kind of contract. It's the same contract we've had, right -- we've had for -- which goes back to 2013. So I think that's pretty steady. I'm not going to go in a lot of detail about what we submitted. We kind of talked about it. When you look at -- this is a best value award. It's about modernization. I mean, what we're -- where we're coming from, Lucy, as you know, the 2013 and then the extension in 2020 was called LPTA. So those margins, it is what it is going to 2020. So we're excited about the recompete. It's gone in, as you know, on 24th of January. We'll go through this process, We expect an award -- probably the back end of 2019 is kind of what we're thinking.

It is a combination. I mean, you've seen it. It's fixed price, some cost-plus, mostly fixed price. And so I'm not going to go into kind of the margin pressure. As you know, the question we have now, while it's about 15-plus percent of the revenue, it's not that -- it's somewhere in between when you think about the margin. We go to the upper end and to 0, somewhere kind of in between. So looking at the best value, we can talk about hypothetically about margin erosion or fixed price contracts to be competitive. I can't get a lot of detail because it's pretty competition-sensitive at this point, but listen, we're very bullish about where we are, feel good about how we've been with the customer for a while, what we're doing, the innovation, the modernization. So I should probably leave it at that, and that might not be exactly which you want to hear. I can't go much further. I'm not talking about the recompete.

Lucy Guo -- Cowen and Company. -- Analyst

Got it. And given that NASA NEST is done, can you maybe -- and also, you have the new 3-year outlook or at least refreshed strategic plan. Can you maybe just tell us what sort of recompete risk we can look forward to outside of NGEN going forward?

Mac Curtis -- Chief Executive Officer

Yes. So the NASA -- frankly, just a little color on the NASA ACES contract was frankly -- I think we've talked about it. It is a bit of struggle. I mean, it was a 7-year contract. With HP, I think average -- it's public knowledge that there was a claim filed to the contract board of appeals, settled in 2014 for about $70 million, not overly good for customer relationships with NASA.

That's just water under the bridge, worked really hard to drive it, the performance but you've got to kind of deal with -- sometimes with things that happened in the past. So we'll see what happens in the debrief. We'll make the right decisions to kind of go forward. But I think what we really like is we start to look at some of the new work that's kind of rolling in. We're excited about the area of cyber. We're excited about the new strategy. And so we'll kind of move along.

Lucy Guo -- Cowen and Company. -- Analyst

Can you...

John Kavanaugh -- Chief Financial Officer

I mean, I think that if you -- if we look next year, other than NGEN, it's not a huge recompete year by extracting that.

Mac Curtis -- Chief Executive Officer

I'm sorry. Yes, I lost the question for a minute. I'm sorry. I'm sorry I lost the question. So yes. So we talked about it -- well, I'm sorry. I just phased out there for a minute. So when you look at -- this was -- the NGEN is a big piece. We've talked about 15-plus percent. When you look outbound, there's a classified recompete. We're right in the middle of it now. It's no more than 2.5%. After that, it kind of falls off precipitously. Maybe there are 2 others that are 2%. They're kind of like the big ones on the next 12 to 18 months. So there's not a whole lot that we're leaning into, and we're not sure when those other 2 will come out. But what we like, when you look at it, is 80-plus percent, 82%, 83% of a $72 billion pipeline being net new. I apologize, Lucy. I kind of lost the question for a minute.

Lucy Guo -- Cowen and Company. -- Analyst

But doesn't that -- so are you reaffirming your 3-year outlook provided from last year?

John Kavanaugh -- Chief Financial Officer

So at this point, what I would say big picture, right, is we're very pleased with the performance, the execution in both of the segments, OK. So at this point, 8 months in, we haven't seen anything that detracts us from what we said at Investor Day. Clearly, as we're moving forward, we're certainly not ready to give any FY '20 guidance. We're working on our operating plans, and there'll be more information to come forth in the near term.

Lucy Guo -- Cowen and Company. -- Analyst

Great. Thank you very much. I will pass it on.

John Kavanaugh -- Chief Financial Officer

Thank you.

Operator

And the next question will come from Krishna Sinha of Vertical Research Partners.

Krishna Sinha -- Vertical Research Partners. -- Analyst

Hi. Thanks. Maybe a couple of housekeeping questions for John then one for -- yeah. So on civil and healthcare, operating income, if I'm just looking at GAAP operating income, it was $26 million. Can you just make -- break out the moving parts there? That seems a little bit lower than what your run rate was the first 2 quarters. And how do I square that number with the -- either the full year projections and/or the increased EBITDA margin guidance that you just gave today?

John Kavanaugh -- Chief Financial Officer

Sure, sure, sure. Thanks for the question, Krishna. So let's talk about civilian and health. So again, in the quarter, like I said last quarter, OK, we thought their margin would be in the 12% to 13% range. They executed at 12%, which is strong performance in that segment. It was really in line with the expectations that we laid out. Obviously, you'll have some normal variability of range, but again, I think as I said last call, last quarter would be indicative of our performance going forward and we're right in that pocket. Now relative to overall, again, we continue to see strong, again, margin delivery in both segments, OK. Based on that performance, we felt comfortable in increasing our range. And as I also said in my prepared remarks, we're expecting to be at or above the midpoint right now based upon the performance to date and what we're seeing moving forward.

Krishna Sinha -- Vertical Research Partners. -- Analyst

Okay. And then tax, I know you made a comment that you expected fourth quarter tax to be higher, but is the full year guidance for -- I think it's 27%. Is that still in effect? Or is it going to change based on this quarter's result?

John Kavanaugh -- Chief Financial Officer

Yes, it's still in effect. Our pro forma tax rate is 27%. I think as you're aware, we have a U.S.-only footprint. Obviously, we operate in a lot of high state -- tax states. That said, we're certainly working diligently on tax planning, but our pro forma estimate right now for tax is 27% for fiscal year 2019.

Mac Curtis -- Chief Executive Officer

Just to be clear, Krishna, when John was talking about the taxes and Q4 specifically, it was relative to cash flow. So it's tax payments, not the tax rate. So we expect to be at 27% effective tax rate in Q4, but we expect to have more tax payments in Q4 than in Q3.

Krishna Sinha -- Vertical Research Partners. -- Analyst

Got you. And then you had mentioned payment processing issue and then AR facility issue. Can you just size the impact of those on operating cash flow this quarter and just talk about -- it sounds like you recovered some of that in the fourth quarter. So I'm just trying to figure out if there is going to be an impact for the year and what the impact was for the quarter.

Mac Curtis -- Chief Executive Officer

Yes. It was timing in nature, OK, so specifically, again, 2 things that I identified relative to the government shutdown. Our AR facility was suspended. We did get that amended and remediated and we collected the cash early part of January. And then again, we did have a payment processing organization for a large customer. They implemented a new system. Collections were slowed down and we've since remedied that. So it was timing in nature. We have remedied them. We collected it. I don't see any real impact on the full year.

Krishna Sinha -- Vertical Research Partners. -- Analyst

Okay. And then one for Mac. You guys talked about at your -- when you first did the road show for this company, you talked about your 3-year expectations on operating cash flow and what you're going to use it for. You had outlined, I think, 11% or side-pocketed for potential deals or M&A. I think that equates to something like $150 million. What's the status of that? I mean, what are you guys seeing in the pipeline? What are you looking at there? Are there any deals that you are having the works right now or that you're working on that could close soon? Or is that something that it's going to more be an impact in the out-years?

Mac Curtis -- Chief Executive Officer

Yes. I think firstly, it's going to be over the horizon a little bit. I mean, as John said, we're going to focus on the debt repayment, the return to shareholders. As we said in the comments, kind of coming out of integration, the team's done a really good job. We've made all the decision with systems, et cetera. So when we look at it, Krishna, as we've kind of done the inventory, what we have and what we need, we start to look at things -- like today, the President signed an executive order for artificial intelligence, which is right in our wheelhouse. Well, how do you take that? And how do you take that applied research from something like Perspecta Labs and really get it in play from a solution perspective?

So Joe, we don't have anything that we've factored on the fillings that follow that SEC filing. But I think there's a lot of stuff that we were looking at. I don't see anything happening in the very near future, Krishna. But we're looking at things that can connect the dots and I've talked about this a little bit as an example. So clearly now, being in the Army side of business, look, we are the company protecting .gov, .mil, now with Cyber Command, now Army Cyber. We've got a couple of classified cyber deals and being able to leverage that and actually get some of those solutions kind of in the hands of the users. And so it's something we've talked about where the Army is kind of combining the way they look at combined arms fighting with EW and cybersecurity, and we've got some solutions developed from Perspecta Labs that fit perfectly coming out of the labs into the PEOs, the Program Executive Offices. And so these are the kinds of things we look at.

We may have a missing piece of the knowledge from the EW side, where we certainly have the 7%. So niche acquisitions that help extend the customer relationship and really provide that capability set and drive that value is something where we look. So it's very focused, Krishna. We're not looking to go buy a company that does -- offer programming in Department of Transportation, not a bad business but just not our business. So we're really focused on cloud IT transformation, cybersecurity. The third piece is really focused on these tools that we've got and to help enhance the mission, Trusted Workforce and then looking at opportunities in space hazard protection, those kinds of things. Is that -- so nothing right now, but with our heads above ground, we're starting to look around. Is that fair -- a fair assessment for you?

Krishna Sinha -- Vertical Research Partners. -- Analyst

Yes, yes. And one quick one, too. Going back to the -- I guess, the KeyPoint -- the old KeyPoint business now just part of your business, I think I calculated that, that was something like 5.5% of sales, but then I saw you in a trade magazine that you said it was about 8% of your sales. I guess, you're categorizing them as the risk decisions business. Can you just clarify for us how big that component of the business is? And what's the trend there? I know that would -- that at the Investor Day, you had spoken a little bit about a move to continuous monitoring or something that could affect maybe in the out-years how that thing is structured. So if you can just give us a little update there. What's the percentage of revenue and kind of what's the outlook?

John Kavanaugh -- Chief Financial Officer

So Krishna, this is John. So -- and I'll turn it over to Mac. But as you're aware, again, we report in 2 segments, Defense and Intelligence, and civilian and health. That business, we work as one Perspecta now. So it's contained in our Defense and Intelligence business, which is roughly about 65% of our revenues. Again, we look at one Perspecta. We don't really deal with legacy companies anymore, right?

Mac Curtis -- Chief Executive Officer

So I think what we said, there's -- as you think about it, there -- in the risk decision group, it's not only KeyPoint. It's a couple of other businesses that focus on analytics, Krishna, and it has to do with what we do for Centers for Medicare & Medicaid Services, using analytics -- excuse me, algorithms and develop to look at rejecting fraudulent payments for Center for Medicaid -- Medicare & Medicaid Services, Medicare, Medicaid. It certainly is one of the businesses. The business, it's a small joint venture that we put together that again leverages these algorithms dealing with unstructured data to provide predictive analytics for patients with rare diseases for drug companies. So what we're doing with this risk decision group is really kind of driving our predictive analytics business across it. So John, do you have a -- got a comment you want to make?

John Kavanaugh -- Chief Financial Officer

Again, we really tried to look at, again, the way we're organized today, and that's how we report and that's how we manage the business. So I would kind of leave it at that.

John McNamara Curtis -- Chief Executive Officer, President & Director

So onto your -- just to give you an update, Krishna, on where we are with the whole clearance process. So the KeyPoint team historically does a large amount of the suitability investigations. So what's happening is an executive order that should be signed any time that moves the NBIB, the National Background Investigation Bureau, from the Office of Personnel Management, OPM, into the DoD, right? So -- and that means doing all the background investigations for DoD and it's not clear exactly about who he tells his community, et cetera. So that moves -- that will move into what is now called the Defense Security Services, DSS. That will move in. And so the scope of that organization will now become the Defense Counterintelligence and Security Agency.

So their scope grows and that's where, Krishna, you'll start to see the advent of a more continuous evaluation and continuous monitoring. It's being done now. It's being done in the intelligence community but it's kind of driving across government. I think it's -- certainly, it's not quite -- paint is not dry yet, but that's kind of what we're planning. So we're involved in looking at the next-generation NBIB system. We're involved with looking at helping the government with continuous evaluation, continuous monitoring. So there's nothing really to report other than there's movement kind of around on the chessboard.

We're still waiting for the executive order. And then things will start to continue of how the government's going to go forward doing -- dealing with the backlog. The backlog is down, but dealing with the backlog as well as what do the systems look like, what are the changes and processes and policies to make sure continuous evaluation, continuous monitoring spreads across the rest of government. That's a long-winded answer. That's kind of 5 months is tough in 30 seconds.

Krishna Sinha -- Vertical Research Partners. -- Analyst

Okay. That's great guidance. Appreciate it. Thanks.

John Kavanaugh -- Chief Financial Officer

Thanks.

John McNamara Curtis -- Chief Executive Officer, President & Director

Thank you, Krishna.

Operator

(Operator Instructions) Our next question will come from Edward Caso of Wells Fargo.

Justin Donati -- Wells Fargo. -- Analyst

Hi, it's Justin Donati on for Ed. The first one I had, just based on your recent win rate, which I think you said was about 35% of this quarter's awards, as you look out over the next 12 months, how much revenue do you still need to go get?

John McNamara Curtis -- Chief Executive Officer, President & Director

Yes. So Justin, if I turn it over to John, I think -- let me be clear about the 35%. So the 35% is not the win rate percentage because we don't provide that. If you take the $1.7 billion we booked, 35% of the $1.7 billion is new business. So that's roughly -- almost $600 million of the $1.7 billion we booked in Q3 is new business and that centers around -- we talked about some of the classified work and some -- the Air Force logging contract we mentioned and some other things. So that's work that now that we've got. It settled and now we'll start to figure out over the next 6 months to a year how do you ramp that up because our quarter ends -- the year ends in about 5 or 6 weeks. So does that help, first of all? Then John, you may have no question, but the 35% is not the win rate. It's the percentage of the total bookings in Q3 that are new business opportunity, new business dollars for us.

John Kavanaugh -- Chief Financial Officer

And I would just say, Justin, that based again on our performance, we did raise again the guidance. We took the higher end of $10 million in revenue. As I said in my prepared remarks, we certainly expect to be at or above the midpoint for fiscal year '19. We've got some tailwinds that we're looking at in Q4 with our Postal and classified ramp-up and some on-contract road test orders. So again, we feel good with the revised guidance that we just provided.

Justin Donati -- Wells Fargo. -- Analyst

Okay, got it. Another question that I had. Just based on the press release, it looks like headcounts remain relatively flat, around 14,000 employees. So I was just wondering if you could talk more about your hiring expectations moving forward.

Mac Curtis -- Chief Executive Officer

Yes, that's a good question. So I think it's for -- a little slower in the quarter, where you'd expect it, because it's October -- after Halloween, you've got Thanksgiving and, obviously, Christmas. So it's about -- up about 200 people for the year. We really focused on it pretty -- one thing you've got to remember that almost 50% of our businesses is from fixed priced and that's an anti-labor model, right? So yes, we've got a lot of -- we have enough openings. We're focused on recruiting. But again, it's not like all of our business is cost-plus, Justin, right? You want to hire as many as you can. So -- but I think, yes -- I think it's -- as we've talked about before, about 75% of our -- 74% of our workforce is outside the D.C. area, which, in some cases, is good. So we're OK with where we are and what we -- as we put the systems together, the 3 systems together, the fact that roughly 80% of our offers are accepted on the cost-plus side of the house. And what we said in the remarks is 45% of the hires in the quarter, which I really like, frankly, and it's a great metric for us -- 45% of the hires in the quarter come from employee referrals. Not only is that cheaper to hire. It also says from a cultural perspective that people are -- friends and family aren't going to go to a company that they don't think has got opportunity and job security for them. So that's a bit of a preaching. I apologize for that. So again, it's about up 200, a couple of people. Now we've got some ramp-ups on some of the projects that we're anxious to get started on. Now that it's February, we should start to see some of the acceptance and really get the recruiting engine going. So third quarter is -- historically is kind of slow, but we are up year-to-year. But again, I do want you to remember when you think about it from a modeling perspective that part of the business is an anti-labor model, so you end up innovation. You take the labor cost out of 57% of the business.

Justin Donati -- Wells Fargo. -- Analyst

All right. I appreciate the color there. And then just last one from me. Just to clarify, so have you now fully kind of let the headwinds from the Kennedy Space Center contract and then the divested intel contract? And if so, I think that 4% kind of rate that you've backed out. Is that kind of a good expectation for growth in that division going forward?

John Kavanaugh -- Chief Financial Officer

Yes. So let me address both of them, Justin. So we have now anniversary-ed the Kennedy NASA one. So it was anniversary-ed in December. So we're through that headwind, OK. And then relative to the contract divestiture that we did in Q1, we will still have a headwind in Q4 and Q1. So it won't anniversary until Q1 of next year.

Justin Donati -- Wells Fargo. -- Analyst

Okay. And the expectations for growth once you kind of get past that headwind?

John Kavanaugh -- Chief Financial Officer

Yes. So at this point, again, we've raised our guidance for fiscal year '19 given the reasons I have laid out. We feel good about that. We, again, expect to be at or above the midpoint. We're not going to address FY '20 guidance on this call. Again, as I said a little bit earlier, we're only 8 months in. We're certainly preparing our operating plans. We're very, very pleased with the performance and executions, specifically the bid for NGEN. It's given us a strong foundation, but I think big picture right now, we're executing to our plan. And nothing detracts us from what we talked about 8 month ago on Investor Day relative to long-term outlook. I'll leave it at that.

Justin Donati -- Wells Fargo. -- Analyst

All right. Great. Thank you.

John Kavanaugh -- Chief Financial Officer

Thank you, Justin.

Stuart Davis -- Vice President of Investor Relations and Strategy

Laura, I think that we've come to the top of the hour. So I think that we'll conclude the call now. I want to thank you for your help and obviously thank everybody for their attention to the Perspecta story, and we look forward to catching up with you after the call over the coming months.

Operator

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

Duration: 61 minutes

Call participants:

Stuart Davis -- Vice President of Investor Relations and Strategy

Mac Curtis -- Chief Executive Officer

John Kavanaugh -- Chief Financial Officer

Jon -- Stifel -- Analyst

Joseph Vafi -- Loop Capital. -- Analyst

John McNamara Curtis -- Chief Executive Officer, President & Director

Lucy Guo -- Cowen and Company. -- Analyst

Krishna Sinha -- Vertical Research Partners. -- Analyst

Justin Donati -- Wells Fargo. -- Analyst

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