Q4 2019 Earnings Call
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My name is Daniel and I'll be your conference operator today.
This call is being recorded.
I would like to turn the presentation over now to your host for todays call Mark Sadler, Vice President Investor Relations for P. AG. Please go ahead Mr. <unk>.
Good morning, and thank you participating in P.A. is fourth quarter and full year 2019 earnings announcement, we hope you've had an opportunity to read the press release that we issued earlier this morning.
We've also provided presentation slides on the Investor Relations section of our website.
The call with me today, or John Hele, or <unk>, as President and Chief Executive Officer, and Charlie paper, <unk> Chief Financial Officer.
Today, John will discuss the key highlights of 2019 and our goals for the current year and Charlie will provide an overview of our fourth quarter and full year financial and operating highlights in our 2020 financial outlook.
We then we'll close with a question answer session.
Management may make forward looking statements during the call regarding future events anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.
Actual results may differ materially from those projected in the forward looking statements due to a variety of factors. These factors are described in our FCC pilings. Please refer to our earnings press release for P.A. is complete forward looking statement disclosure, we did not undertake any obligation to update forward looking statements.
Management will also discuss non-GAAP financial measures during this call and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures reconciliation of these non-GAAP financial measures to the comparable GAAP measures are contained in the press release and Investor presentation issued earlier today.
And now I will turn the call over to John Heller.
Thank you Mark and good morning, everyone. Thank you to everyone joining us today on our first call was a public company. We greatly appreciate your interest in P.A.
Subsequent to the ended the year P.A. closed a transaction with a special purpose acquisition company worst back.
Called Gore's Holdings, three and that's a result is now a public company listed on NASDAQ.
Becoming a public company was an exciting milestone and Charlie and I would like to start by thanking our customers and our employees who made this success possible.
We're excited about how this new capital structure will support the ongoing growth of success for P and its customers employees and shareholders.
Given that this is our first earnings call. We thought it would be helpful to provide a brief overview of P.A. I will then summarize the key highlights for the fourth quarter and full year and discuss our strategic growth initiatives before turning it over to Charlie.
By way of background P is a leading provider of mission critical solutions to the U.S. government backed by a highly respected brand with a 65 year history of success.
From our beginnings, providing engineering construction services for post World War, two reconstruction efforts to later, providing operations and maintenance services during the Vietnam War and to fighting Ebola in Liberia, we have been a trusted longstanding partner to the U.S. government.
We have a highly diversified portfolio with a long contracts averaging over seven years and when.
That provide stable and predictable performance. Moreover, in 2019, no single contract represented more than 8% of revenue.
P. or use reputation as a trusted partner the federal government and our global workforce of more than 20000 people have fueled the growth in our business over the last several years.
Since the time I took the role of CEO in December of 2013, we have grown revenue at 13% compound annual growth rate and bill P into a scaled services provider with about 2.8 billion in revenue today.
We provide our broad range of mission critical services through two main segments Global mission services, which we refer to as Gms and National Security solutions, which we referred to as NSS.
NRG Umesh segment, we support the execution of complex in critical worldwide mentioned by leveraging our capabilities and logistics platform maintenance International development and infrastructure management.
Our NSS segment supports national security solutions by providing training intelligence analysis and other professional services to a diverse set of federal government customers.
With that as background I'd like to speak for a moment on piece goals for 2020.
Almost a full quarter ended the year, we are fully engaged on priorities focused on driving driving topline growth expanding profit margins and lowering our cost of debt I.
I would like to touch on these priorities briefly.
First driving topline growth.
We have developed strong market positions across multiple business areas of our portfolio. These are robust in growing end markets fueled by the government is focused on near term readiness and a strong federal spending environment.
Our business development teams have done a remarkable job of building a robust qualified sales pipeline of approximately 35 billion in areas of significant strength for P.A. and we are seeing ample opportunity for growth across our existing core markets as well as near adjacent areas.
Additionally, our BD teams and tend to build the pipeline and successfully bid task orders on our growing I'd like to portfolio.
Behind this proven growth plan is a multiyear strategy, we have been executing since I joined in 2013.
We know piece core strengths and we have strong conviction about the end markets, we want to expand into.
As the sector is shifted we're focused on a large and growing addressable market within the managed in engineering services segments.
Strategic focus in these segments will allow us to continue to diversify across both key capabilities in customers, while incrementally expanding margins.
Piece longstanding customer relationships, coupled with our expansive set of capabilities provides a strategic pathway to generate incremental higher value added work.
Looking back over the past few years, we have grown from mid 4% margins to 6% today.
Based on our growth strategy, we have a focused margin expansion plan to grow to 8% overtime through an effort focusing our bid pipeline on margin expansion opportunities.
Driving contracts scope expansion and realizing synergies on M&A initiatives that is a major priority of my management team and we are executing our strategy to hit this target.
With regard to M&A, our strategy is focused on extending into adjacent business Aries, adding complimentary capabilities and expanding our core addressable market, while delivering meaningful meaningful synergies.
Lastly, we will look to strengthen the balance sheet in 2020, we're evaluating a refinancing to lower our cost of debt and we will use excess cash flow to pay down debt, while retaining capacity in the event, we're successful signing an attractive acquisition.
In summary, P is laser focused on growing the topline expanding profit margins and lowering our cost of debt all of which is expected to increase shareholder value.
Wholeheartedly believe p. represents a compelling investment opportunity given the trading multiples of our peers relative to PE combined with the value creation plan, we are executing.
With that background I'll now turn to fourth quarter results. It was a very good quarter all round as we delivered revenue and adjusted EBITDA above our plan.
We generated 277 million of net bookings in the fourth quarter, resulting in 3.1 billion for the full year, the latter being an all time high for PD.
Of the full year bookings the vast majority is on contract growth in new business.
The strong level of contract growth in New business Awards is an affirmation of our dedication to service excellence and our bid and proposal strategy and as the basis for our long term outlook.
Fourth quarter awards or a Prime example, the contract diversity in our business our diverse contract wins included certain training services for helicopter pilots law enforcement training for the department of Justice real time monitoring of climate and tsunami activity the saves lives.
And background investigations and adjudication case work in support of security investigations.
Moreover, we started off 2020 on a strong note with our NSS segment awarded the global Tactical advanced communication systems, and services or G. tax to I'd like to contract in January the US Army awarded seats to 16 large companies on this 10 year 5.1 Bill.
Liam contract vehicle to supply technology services in hardware support to develop new tactical communication networks for soldiers. This award strategically places Phd inside of a key C. I have SAR contract vehicle, enabling us to expand our C for ice our capabilities and we.
We expect task orders to be awarded in the second half of this year.
Moving onto the federal contracting environment, we continue to see strong RFP activity and expect that to continue throughout the 2020 calendar year.
The budget perspective, the two year agreement signed in August in conjunction with the passage of government fiscal year 2020 appropriations bills provides healthy spending levels for our customers, particularly in areas aligned to phds core capabilities, such as counter threats solutions military rated readiness and sustain.
Payment and humanitarian initiatives.
As we gear up for the presidential election, and government fiscal year 2021 budget discussions I'd like to share our views on how this may impact P.A.
When we look back over the past 20, plus years, we have seen little variability in our business under a red were Blue administration piece contracts are predominantly funded from stable portions of the federal budget, including with little dependence on more time or emergency OCO funding. Furthermore, our contract.
It's are primarily mission critical enduring missions with little dependence on operational tempo a great example, being our embassy work.
So we feel really good about our outlook, we're competing in the right areas and believe we are well positioned to win new work, which reflects our belief there will be a continued focus on near term readiness and monitor station.
Serve these needs from a contracting perspective fee has grown attractive portfolio successful I'd like to vehicles that allow for efficient procurement during the fiscal year and we have proven experience a competing for large and complex new program starts Consequently, I am confident that.
He is competitively positioned to execute our growth strategy.
Next up let's focus on our sales pipeline and top opportunities.
As I mentioned, we entered 2020 with a qualified pipeline of about 35 billion and opportunities comprised of an attractive mix of large prime single award opportunities in task orders on existing I'd like to vehicles.
Over the course of 2020 PE is on track to submit more than $12 billion bids, which are predominantly new business and on contract growth.
We are extremely busy across all BD efforts and based on the level of federal spending we're expecting Phd in the entire sector should be set up well for a strong year of awards.
In closing our fourth quarter results were a strong ending to a great year with increased organic growth solid profitability robust cash flow and record full year net bookings, we're well positioned for a strong 2020 underpinned by a robust pipeline strong sector dynamics and a proven struck.
Dziedzic growth plan. In addition, as a public company with an improved capital structure.
He is well positioned to pursue a pipeline of actionable M&A opportunities. We will continue to execute our strategy and remain confident in our ability to deliver revenue growth margin expansion and shareholder value.
With that I'll turn the call over to Charlie for an overview of our fourth quarter and full year 2019 financial results more detailed key business development metrics in 2020 financial guidance.
Thanks, John Good morning, everyone.
I'll start with our fourth quarter results out of consolidated level and an overview of our business segments fourth quarter revenue of 697.1 million exceeded our expectations direct labor was above plan, primarily resulting from new business awards across both segments.
Adjusted EBITDA at 37.5 million or 5.4% of revenue for the quarter with moderately above our internal plan driven by the increase in revenue.
Our adjusted EBITDA for the fourth quarter backs out roughly 27 million a onetime nonrecurring operating expenses.
Approximately 8.3 million is related to M&A divestiture management fees, the latter being fees paid to the company's former private equity sponsor.
About 9.6 million is related to forward loss accruals and 9.1 million is due to onetime nonrecurring expenses and other non cash charges.
Beginning with Q1 2020, we expect the add backs to adjusted EBITDA to be limited to stock based compensation acquisition and integration related costs and extraordinary nonrecurring expenses, such as Sox readiness fees.
Operating loss for the quarter was 3.2 million compared with operating income of 12.1 million in the prior year quarter.
The decrease in operating income resulted primarily from setup costs and new business Awards.
New business delays and onetime impacts from increased operating cost.
GAAP net loss for the quarter was 14.6 million compared to a 13.1 million loss in the prior quarter due to the due to the expense timing in new business delays I previously mentioned.
Next I will turn to our segment results.
Revenues in the Gms segment increased 2% in the fourth quarter compared to the prior year period. This growth was driven by new business Awards.
Adjusted operating income margins in our Dms segment increased 80 basis points from the prior quarter to 6.3%.
Driven by higher revenue and improved performance on international programs as well as normalizing for certain onetime nonrecurring operating expenses.
And our NSS segment, New program wins contributed notably two fourth quarter results driving revenue growth of more than 9% over the prior year period.
Adjusted operating income declined to 3.9 million in the quarter due to set up plus the new business awarded late in the third quarter and onetime impacts from increased operating expenses.
Overall, we are pleased and the growth in this business and are confident in our ability to drive margins higher over time in this segment.
For the full year and on a consolidated basis, we reported annual revenue of 2.8 billion and adjusted EBITDA of 166.7 million or approximately 6% of revenue.
Based on the 28 2018 in 2019 adjusted EBITDA.
And the pro forma for estimate of public costs.
Adjusted EBITDA grew.
About 10 million or 6% from 154.4 million to 163.7 million, which was 2.5 million better than our 2019 plan.
A reconciliation of the pro forma reported and pro forma adjusted EBITDA is available in our fourth quarter earnings presentation on the Investor section of our web site.
In addition, we reported a GAAP net loss of 49.8 million. Please note that the affiliate full year net loss includes a 32.8 million loss on the sale of the assets of our former is our business.
In addition, we incurred more than 18 million of spec transition costs, which includes fees paid to our former private equity sponsor.
For the full year Gms revenue at 2.1 billion grew about 7% year over year.
Adjusted operating income margins were 6% up 20 basis points from the prior year.
Net bookings in our Dms segment were about 2.1 billion in 2019, representing a book to Bill of one times for the year.
And then that and the NSS segment full year revenue of 664.2 million represented about 4% growth over 2018 results.
Adjusted operating income margins.
Decreased 70 basis points compared to 2018, primarily because of setup costs, a new business, new business delays and onetime impacts from an increased operating it costs.
Bookings in our NSS business increased to approximately 1 billion in 2019, delivering a 1.5 times book and Bill for the year.
Turning to the cash flow statement net cash provided by operating activities was $116.6 million for the full year.
Operating cash flow improved significantly over the prior year, driven by an improvement in cash collections and higher cash earnings. The DSO improved to 60 days during the fourth quarter, which is a moderate improvement over historical levels.
P. Eight PE maintains a very high free cash flow conversion with a yield.
Of about 94% in 2019 Capex for the year was approximately 9 million, which was about 3 million higher than our annual run rate.
We expect spending levels to decrease in fiscal 2020 compared to historical levels.
Subsequent to the end of the fourth quarter and in conjunction with respect transaction. The company pay down approximately 137 million of the second lien debt on its term loan facility. This transaction significantly reduces our cash interest payments going forward and results in pro forma net leverage at 3.5 times as of the date of closing.
PAA ended 2019.
With 68 million in cash and cash equivalents and 122 million of available capacity under our revolver.
Now I'll briefly recap, our bookings and backlog metrics for the year.
For the full year, we generated $3.1 billion net bookings or 1.1 times revenue.
As John mentioned in his remarks, the vast majority of awards were for on contract growth and new business.
Total backlog at the end of the quarter was 6.4 billion, which 1.5 billion.
Was funded.
And as of year end, the total and bid submitted and awaiting award is approximately 7 billion. In addition, we plan to submit bids of more than 12 billion throughout the year.
Moving on to 2020 financial guidance.
We expect revenue to be in the range of 2.75 to 2.85 billion approximately 85% of our revenue guidance at the midpoint is in backlog.
Approximately 10% is from Recompete contracts and approximately 5% is from New service Awards.
We expect adjusted EBITDA as being a range of 170 million to 178 pro forma for public company costs. This represents a year over year growth of 6.3% at the midpoint, assuming 3 million in estimated public company costs.
Our financial guidance does not include any risk associated with the Corona virus. We are monitoring the situation and to date, we have not seen a we have seen a minimal impact.
We anticipate revenue to be moderately backend weighted with sequential revenue increases each quarter first half 2020, adjusted EBITDA is expected to increase compared to the same period last year. The majority of this adjusted EBIT increase is expected in the first quarter of 2020, we expect a modest reduction adjusted EBITDA margin in.
In the second quarter, as we ramp up new business and the third and fourth quarter is expected to moderately increase from the second quarter levels.
With 85% of the revenue guidance in backlog low recompete risks and high visibility in our New service Awards, we're confident in our full year adjusted EBITDA guidance. Moreover, this guidance does not include bids that have yet to be identified in other words there is no.
There is no go get in our guidance.
With regards to cash generation based on the existing capital structure, we anticipate generating a range of 80 to 90 million of free cash flow as John mentioned in his remarks, we continue to evaluate refinancing opportunities.
Other key assumptions for 2020 guidance are available on our fourth quarter earnings presentation on the Investor section of our website with that operator lets open the call for questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to.
To withdraw your question first the pound.
Please standby will we compile the Q and a roster.
Our first question comes from Ashish Sabadra with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my questions. So good results and good to see the solid momentum and assess backlog and revenue.
I was just wondering if you could provide any further color on the pipeline.
Particularly the Clintons you know first to make it for some sub bank.
So you can provide any color how much effort as gms at NSS and also any color on the historic Bankrate and help me think about demand going forward. Thanks.
Yes, Thanks Ashish.
Okay, Great you joining the call and good morning.
With respect to pipeline over the.
Past few years, we've been very focused on.
Using M&A as a way to expand our addressable market and we have more than doubled our addressable market over the past few years, which has allowed us to grow our pipeline significantly and expand.
The number of bids we've been able to submit on an annual basis as.
Charlie and I mentioned, we're anticipating.
Over $12 billion of bids this year, we have a very clear line of sight on that number we expected to be.
Significant for the year in that pipeline.
Surprisingly, we're seeing about 50 50.
Between a 50 50 split between our Gms and NSS segment. So we're really excited about that the NSS business has had.
Some great success on wins in the past two years of great momentum last year.
Very high high win rates.
So we're very excited about what the potential is for the NSS business butter Gms business as Charlie mentioned performed very well and 19.
So.
When rates for us.
We're we're probably about industry average in that.
30%, 37% in the Gms business NSS has been at least in 2019 over 40%. So our hope is to see them continue with that success. This year.
That's very helpful and maybe Charlie a question for you.
The leverage was three and a half times, how do you think about leverage over the longer and just given the robust free cash flow provided in the business. How should we think about the leverage and then John you mentioned many strategic M&A.
Wondering if you could just provide some more color on what are the core pillars of fed M&A strategy.
Thanks, Great. Thanks for the question.
The way I would describe it is that we're focused on value creation and balance sheet flexibility what do I mean by that is that.
Our primary focus on growth, which is the organic growth the John's already talked about with the investments. We've made we've been able to leverage those opportunities to drive organic growth of the flexibility of the balance sheet, we want to use that flexibility to continue to support M&A transactions, we will target on average.
Rich that the leverage ratio should be anywhere between three and three and a half times.
We're very comfortable operating with.
A slight increase in the leverage ratio to quickly de lever overtime. The acquisitions that were looking at have the same characteristics that we have this high free cash flow, we're very comfortable that after an acquisition, we're going to be able to quickly de lever a nine to 12 month time period.
Yes, just to follow on the second part of that with respect to this strategy itself I mean, certainly over the since I've been a PE our strategy has been one about diversification.
And we have been working hard to grow organically to diversify and that's really been our focus we havent acquired a company in the last two years, but weve used M&A very successfully to help us expand the business and diversify so what we're looking for.
Opportunities that are good value that help us grow EBITDA margins and as Charlie mentioned, when combined with PE really positioned us for stronger organic growth rates going forward and what we're really focused on is continuing to expand into markets that have higher margin higher growth potential.
Targets for us would be engineering services.
Intelligence operations areas, such as like operations and maintenance in classified spaces intelligent solutions.
Intelligence analytics and systems engineering is another area that we're looking at that we think fits very well with PA capabilities.
That's very helpful. Thanks, a lot.
No.
Thank you.
I'm not showing any further questions at this time I would now like to turn the call back over to Mark Sadler for any closing remarks.
Thanks, everyone for joining us this morning and for your continued interest in PA.
If you have any questions. Please don't hesitate to contact me and with that will end todays call have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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