Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019 Persons Corporation earnings Conference call.
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After the speakers presentation, there will be a question and answer session.
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When I was thinking the conference over to your speaker today, Mr., Dave spelling VP Investor Relations, Sir you may begin.
Thank you good morning, and thank you for joining us today to discuss our fourth quarter in fiscal year 2019 financial results.
Please note that we provided presentation slides on the Investor Relations section of our website on the call with me today or truck Harrington, Chairman and CEO, George Ball, CFO, and Kerry Smith, President and Chief operating Officer.
Today, Chuck will discuss execution against our corporate strategy George will provide an overview of our fourth quarter financial results and then Kerry will review our operational highlights. We then we will close with a question and answer session.
That's right May also make forward looking statements during the call regarding future events, just made to 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 risk factors will be described in our form 10-K for fiscal year ended December 31, 2019, and other FCC filings.
Please refer to our earnings press release for Parsons complete forward looking statement disclosure.
We do not undertake any obligation to update forward looking statements.
Management will also make reference to non-GAAP financial measures. During this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures and now we'll turn the call over to Chuck.
Thank you Dave.
Welcome to parse this fourth quarter in fiscal year 2019 earnings call.
We had a strong finished 2019.
And we ended the year with record revenue record profitability and generated solid cash flow into second half of the year.
We continue to deliver on the plane, we outlined in our IPO, our federal solutions business achieved strong organic revenue growth and we produced significant margin expansion across the enterprise.
We also invested in our people and our technology and leverage our strong balance sheet to complete two strategic acquisitions during the year.
Our strong sales performance resulted in growth of our backlog from last year and resulted in a trailing 12 month book to Bill ratio of 1.1.
We also reduced our net debt to a trailing 12 month adjusted EBITDA leverage ratio a 0.2 times.
Finally, our employees continue to exemplify their passion for delivering a better world. Our teams contributed time and resources to various environmental social and governance initiatives.
In terms or fourth quarter financial results.
We delivered revenue growth of 12%. This includes 14% organic growth in federal solutions.
Adjusted EBITDA growth of 62%.
A 260 basis point improvement, our adjusted EBITDA margin to 8.5%, which was driven by strong margins in both business segments.
A trailing 12 month book to Bill ratio of 1.1, which was driven by 1.3 and federal solutions.
And with this strong performance federal solutions now represent 48% of Parsons revenue up from 43% in the same quarter last year.
Our winning business momentum continues.
We reported strong organic revenue growth driven by solid program execution.
Recent acquisitions further contributed to this growth.
Simultaneously, we increased our adjusted EBITDA margin by over 200 basis points in each segment during the fourth quarter <unk>.
The margin expansion was facilitated by five factors.
Selling more software and hardware products.
Acquiring higher margin businesses.
Reshaping our portfolio as we continue to run off lower margin pass through revenue.
Bidding on higher margin pursuits, and effectively managing our cost structure.
Regarding sales in our federal solutions business.
We continue to perform extremely well.
Our segment win rate for fiscal year 2019 was approximately 50%.
Our cyber and intelligence business led the corporation with new and Recompete win rates at 90% and 100% respectively.
This continues our robust growth in the rapidly expanding high margin cyber market.
And just one quarter after winning the largest cyber contract in our history.
We were awarded for new strategic cyber contracts, including a 90 million dollar win with the classified customer.
We also had large strategic contract wins within our critical infrastructure business.
We were awarded two large joint venture projects in the fourth quarter, which carry will discuss in a few minutes.
As I mentioned previously in fiscal year 2019, we successfully executed this strategy, we outlined at our IPO.
Our objective was to deliver strong organic growth in our federal solutions business and we achieved organic growth are greater than 6% for the full year.
In terms of our strategy to deliver material margin expansion across their enterprise.
We achieved 130 basis point expansion in 2019.
This was driven by a 160 basis point increase in critical infrastructure and to 70 basis point increase in federal solutions.
Our strategy also acknowledges that are most importantly assets or people and our technology.
We further invested in both our people and technology in 2019.
As examples we increased our research and development budget 2019 and plan to approximately doubled that investment again in 2020.
We also continue to invest in our benefits retirement plans facilities in training and development programs to ensure we attract and retain the very best talent.
We've also executing our plan to leverage our strong balance sheet.
In 2019, we completed two key acquisitions that met our three key strategic priorities.
They provided technology solutions, and our focus areas in core markets expand their customer base and the augmented our sales differentiation the led to increased win rates and our ability to prime larger contracts.
Lastly on strategic front M&A will continue to be a significant part of our growth.
We will leverage targeted M&A to augment organic operations in three key areas.
Hence our existing business.
Extending us into new markets and transforming Parsons by building, our technology and transactional product revenue streams.
This transformation already underway will augment our services business with software and hardware products that are scalable and bring comprehensive solutions to new and existing customers.
As we stated before we focus on solving our customers most vexing mission challenges.
In addition to this mission critical work, we perform for our customers.
I'm extremely proud of our contributions to deliver a better world as an example during 2019 our employee team members built pedestrian bridge is in both South America and Africa.
These bridges, where needed to connect isolated communities to education food supplies medical services and economic opportunity.
Our employees also participating community service events that benefited organizations such as a tragedy assistance program for survivors are caps, the special operations Warrior Foundation and girls lead the way.
Parsons also awarded scholarships to high school stem students for developing innovative next generation ideas, all consistent with our corporate purpose to deliver a better world.
Core values define who we are as a company.
In 2019 was year highlighted with numerous awards for our safety hiring and integrity leadership.
We also just received notice of our inclusion Ethisphere Institute list of the world's most ethical companies, where the 11th consecutive year.
Finally.
We pursue markets clients in assignments, where we positively impact communities and regions.
We seek assignments, where we can improve the quality of life through enhanced safety increase mobility reduce carbon emissions and reduced fuel consumption.
These assignments are core to our critical infrastructure segment and in addition to the benefits I just outlined they also improve communities by spring local economic growth enhanced by our innovative advanced transportation management systems.
In summary.
We had a strong 2019.
We delivered record revenue record profitability strong organic growth and significant margin expansion in both business segments. Additionally, we invested in our print employees and technology to further differentiate Parsons solutions.
We also continued to deliver a smarter safer and more sustainable future through our SG initiatives and our roles in supporting our customers vital missions with that I'll turn the call over to George discuss our fourth quarter and fiscal year 2019 financial highlights George.
Chuck and good morning, everyone.
Today, all Oregon as my remarks into the following five key areas.
The income statement cash flow results our balance sheet.
Contract Awards in 2020 goods.
I'll also discuss certain financial measures on an adjusted non-GAAP basis.
We're doing so provides a meaningful comparisons to prior financial results.
This truck indicated we had a strong finished at 29 cents.
Reported record revenue and profitability for the full year.
Total revenue for the fourth quarter increased 12%.
With strong organic revenue growth of 7% from the fourth quarter of 28 soon.
For the full year total revenue increased 11%.
Organic revenue growth of 4%.
It was driven largely by federal solutions with organic growth of more than 6% in that segment.
Indirect cost you're going to expenses increased $25 million from the fourth quarter of 2018.
Primarily due to additional acquisition intangible asset amortization expenses.
Cost related to legacy long term incentive compensation plans.
As indicated in our previous earnings calls this incentive compensation expenses driven by fluctuations in our sure Chris.
The primary long term incentive plan that gives rise to this expense.
I will continue through the end of 2020.
And we'll then sunset.
GAAP EPS for the quarter increased to 14 cents for sure and adjusted EPS increased to 48 cents.
Adjusted EBITDA of 88 million increased $34 million were 62% from last year and adjusted EBITDA margin improved by 260 basis points from the fourth quarter of 2018.
These significant increases were driven by strong results.
Across the entire business.
I'll turn now to our operating segments, starting first with federal solutions were fourth quarter revenue grew 24% year over year.
This increase was due to organic growth of 14% and contributions from our oji systems and Q RC acquisitions.
Federal solutions adjusted EBITDA doubled from the prior year quarter, and our adjusted EBITDA margin increased 330 basis points to 8.5%.
These increases were driven primarily by contributions from our acquisitions.
And higher margin growth on existing contracts.
Now a few words regarding our critical infrastructure segment.
Fourth quarter organic revenue grew 2% year over year driven by growth on existing contracts.
Critical infrastructure, adjusted EBITDA increased 36% year over year, and our adjusted EBITDA margin increased 210 basis points to 8.4%.
These increases were primarily driven by improved contract performance execution and cost reductions.
Next I'll discuss cash flow and balance sheet metrics.
Our net Dsos at December 31, 2019 stands at 55 days.
Compared to 52 days at the end of 2018.
And 58 days at the end of the third quarter 2019.
Our fourth quarter operating cash flow totaled $90 million and we generated strong cash flow is $269 million over the second half of 2019.
Fourth quarter cash flow was less than anticipated.
Was impacted by accelerated client payments received in the per quarter.
Higher than expected cash taxes and contract extensions that have lengthened the completion of certain legacy projects.
The associated collection of performance incentive fees and contract retention.
Capital expenditures totaled $24 million in the fourth quarter, 2019, and $68 million for the full year.
As discussed in previous quarters.
Next has been an elevated levels throughout 2019, primarily due to cost associated with ongoing office consolidations.
Systems automation initiatives.
We anticipate capex to decline as a percentage of revenue in 2020.
And over the long term, we expected to approximate 1% total revenue.
Our balance sheet continues to be very strong.
At the end of the fourth quarter gross and net debt were 249 million and $67 million respectively.
As we ended the quarter with a net debt leverage ratio of 0.2 times.
Regarding awards, we reported contract awards of $903 million in the fourth quarter.
Representing a book to Bill ratio of 0.9 times.
For the full year 2019, our book to Bill ratio was 1.1.
Our backlog at the end of 2019 totals $8 billion, representing approximately two years of revenue at our current run rate.
Now, let's turn to our guidance for 2020.
For fiscal year 2020, we expect revenue to be between 3.95 and $4.05 billion.
Adjusted EBITDA is expected to be between 330.
And $360 million.
The margin of approximately 8.6% at the midpoint of our revenue and adjusted EBITDA guidance ranges.
Our cash flow from operating activities is expected to be between 230 and $250 million.
Other key assumptions in connection with a 2020 guidance.
Outlined on slide 10 in today's Powerpoint presentation.
Located on our Investor Relations website.
With that I'll turn the call over to cure to discuss some of our fourth quarter operational highlights during.
Thank you George as Chuck in Georgia indicated we had a strong fourth quarter in fiscal year 2019, I'm very proud of our employees continued focus on the customer and delivery of their critical missions in for producing outstanding financial results for our shareholders.
Fourth quarter, we delivered organic revenue growth in both segments with exceptional growth in our federal solution segment, and we achieved significant margin expansion across both segments.
From a revenue perspective, our success is driven by our alignment to the National defense strategy in growing an enduring markets our ability to win large new contracts achieved strong when rates and deliver solid program execution.
For margin expansion. In addition to the items Chuck mentioned, we executed on our programs to Maximise award and incentive fees and we want higher margin business.
During 2019, we won six single award contracts over 100 billion, which is the most ever in the single year for parcels.
These contracts range and scope from cyber to missile defense to high end software hardware and systems integration work.
In other words critical work that is vital to our customers missions.
We also have seven additional single award contract bids worth 100 billion or more there are waiting notice of award.
Also in 2019, we were awarded seven Prime multiple award contracts over 400 million and value.
In total we now hold over 50 Prime I'd Q contracts.
I'd like to highlight a few notable fourth quarter contract wins.
90 million cyber contract with classified customer.
Three additional cyber contract awards valued at 77 million.
The work on these contracts is for classified and non classified federal customers to provide various services, including security resilience architecture development secure communications.
Cyber risk and threat assessment for the enhancement resiliency of weapons systems especial security capabilities required and dynamic operational space missions.
As part of a joint venture team Parsons was awarded the 805 million Foothill Gold line Light rail extension project that will benefit travelers across all Los Angeles Metro service area.
We're at 25% joint venture partner on this project and we're providing design and construction management services.
As part of another joint venture team, we were awarded 194 million contract for the 14 mile extension of the greater Minneapolis Light rail transit system.
On this contract for a 35% joint venture partner and we're also providing design and construction management services.
Finally, we were awarded a multiple award contract with a ceiling value of 2.1 billion for utility monitoring and control systems.
Parsons has supported this critical work for over 30 years.
On the technology front, we're focused on driving innovation through our research and development investment and leveraging our portfolio of other transaction agreements or OTI ace.
Okay provide a responsive vehicle to advance research and development deliver innovative solutions and perform rapid prototyping.
We're consortium member on 32.
And we have over 300 million active OTI awards, we've already received an additional $50 million No Ta awards year to date in 2020.
Strong execution, our existing contracts is also driving revenue growth through high recompete win rates, our ability to recognize milestone payments and incentive fees and our ability to win new work due to strong past performance on existing contracts.
Our performance execution had some distinguished highlights Inc. fourth quarter.
So waste processing facility, where we completed our contractor operational readiness for the verifying our readiness the startup the nuclear facility operations.
In the Smart cities Challenge, where we announced the 10 semifinalist on our first ever Smart City challenge with our partners, including Amazon Web services Bryson and co promotion.
This competition entitled transforming intersections will significantly increase mobility around cities and reduced the time citizen spend at Red lights.
Applications were received from around the world in the winter will be announced in the second quarter of 2020.
And finally, as we announced in November 2019, we realigned our organization to further drive business growth and execution in 2020.
As part of this realignment, we consolidated our eight markets in the six markets, which includes cyber and intelligence missile defense and Sci Fi bias our.
Space and Geo spatial solutions.
Engineered systems mobility solutions and conduct a community.
This structure enables us to further focus on growth markets and better leverage organizational synergies.
From a technology perspective, we initiated a product management organization to further develop solutions in critical areas, such as sensors data processing and analytics directed energy commanding control and critical infrastructure, which are applicable to our cyber space.
Missile defense markets.
In addition, cure see technologies that company that we acquired and third quarter of 2019 recently filed for new artificial intelligence patents.
This complements our core portfolio of over 70 artificial intelligence contracts.
In summary, our team continues to grow and execute well and I'm proud of our many accomplishments we achieved our revenue and profitability objectives. One large strategic contracts delivered strong program performance to enhance new in Recompete win rates.
Significant OTN I'd Q awards, and optimized our organizational structure to drive additional growth.
With that I'll turn it back over to Chuck.
Thank you carry to summarize 2019 was a successful first year as a public company with record revenue and profitability.
As I look forward I'm very excited about our future we have a federal solutions portfolio aligned to the national defense strategy and its focus on multi domain operations.
This strategy prioritizes, our advanced capabilities, including cyber space Hypersonics and artificial intelligence.
We have a critical infrastructure portfolio aligned with the trends of urbanization and technology transformation that leverages, our technology and operational expertise to deliver a smarter safer and more sustainable future.
We have a strong balance sheet that we will utilize to continue targeted organic and inorganic investments.
We also have a disciplined business strategy focused on leveraging our business momentum to drive additional growth margin expansion and shareholder value.
Now, we'll open up the line for questions Dave.
Operating may give the instructions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key one your Touchtone telephone. If your question has been answered or you wish or move yourself from the Q. Please press the pound key once again I ask a question. Please press star and then one now.
And our first question comes from Matt Sharpe from Morgan Stanley. Your line is open.
Chuck George carried good morning.
Good morning that.
On the 2020 revenue guide what does it imply for organic growth at the company in segment levels and.
Maybe just some color around how we should think about the quarterly cadence this year.
Thanks, Matt This is george relative to the quarterly cadence.
Suggest that you do the same shape of the curve. Those you saw in 2019, which has actually been kind of our history for the long term.
Relative to organic growth, we anticipated a mid single to high single digit growth in the federal segment.
And in fact in critical infrastructure, we expect that we'll see a decline in revenue, which is in keeping with what we've been saying throughout the IPO.
Between 2018 to 2019 will be down very slightly so you can consider critical infrastructure over the term is being flattish.
Got it thanks, and then just a quick one on a balance sheet flesh capital deployment, obviously, a the leverage is approaching year zero at this point and your cash balances.
Switching to 200, so so plenty of dry powder. There can you give us an update on what your what your M&A pipeline is looking like relative to recent quarters. Obviously, there's been a flurry of activity here throughout industry and so I just want to get a sense of what you're seeing in terms of.
Size and in terms of number of transactions across and your desk.
Great question, Matt. This is Chuck Yeah, you're right that the M&A pipeline remains full and very active.
We are continuously screen that pipeline for prospects that are aligned with our core markets and is as we stayed that's been cyber Intel defense Sci Fi bias, our space Geo spatial and connect communities and also the core technologies. We're looking for artificial intelligence autonomy is cloud computing and Aiotv and the good news as theirs.
A lot of companies out there of various sizes and configurations.
We're really can continue to focus on a higher margin higher growth.
Companies that have a fair amount of IP in either software or hardware products in our mission focused.
And in that we've we've got a robust pipeline that we're viewing.
Weekly and in constant discussions with companies determining where they're going and how they align with our strategy or don't align with our strategy.
Got it thanks very helpful and.
One last one if I may I, just want to get your thoughts here on a the F. why 21 budget, obviously, it's roughly flat depending on how you slice it but obviously the company has a refocus itself into some higher growth.
Areas of that budget, so any color around that that might help us think about how your addressable market. If you will is growing here would be useful.
Well as we think of the National Defense priorities, We think we're right in line with where they're looking obviously its.
We're involved in daily cyber skirmishes around the world and is in the Americas Gonna have to keep its vigilance and investments in its cyber defenses.
We also are in a in a space environment that is getting more crowded with more participants and another place where between our launch.
Integration capabilities ours command and control and cyber capabilities for space.
We are going to continue to play a major role and protecting us is space and Geo spatial assets.
And.
Additionally, as we look at Hypersonics potential as from an missile defense perspective, that's an area. We think we'll continue to get investment so although the topline maybe flattish we think that underneath that there are areas that are growing and we think we're position in those and others that may be trend in order to maintain the growth of these.
Or is it the nation views as higher risk.
Critical infrastructure when you look at the urbanization trends that we're talking about in the technology transformation. There literally is in a city or transit agency that we haven't talked to that is trying to consider how to deal with increased traffic either in transit systems or autos more effectively more efficiently and more safe and that's.
Right into sweet spot of where we're focused on on those budgets as well.
Great.
Excellent.
Thank you. Our next question comes from Gavin Parsons from Goldman Sachs. Your line is open.
Thanks, Good morning, everyone.
Good morning Gavin.
Hey, George I was hoping you could walk us through a just cash from ops for 2020, just as we look back at 17 18, new was.
Two hundreds.
20 is kind of low to mid two hundreds, but presumably 2020 includes a little bit of catch up of the 2019 fee Awards slippage.
So maybe just what's a normalized conversion ratio and what or any kind of nonrecurring headwinds that are happening in 19 or 20. Thanks.
So let me start there Kevin with 19 2019. This shortfall is probably about two thirds related to client working capital items.
Which is noted in the prepared remarks relates to the lose extension of the times on projects, which in many cases actually will fall over into 21.
It's split about evenly between the federal solutions and critical infrastructure segments.
The other one third related primarily to cash taxes voters sundry other issues.
Including items related to the IPO or a little bit higher than anticipated in 20 that changed from.
Prior expectations relates to again, some movement of working capital to 21.
But also relates to issues associated with payments of incentive compensation amounts that we've talked about on the recent earnings calls.
In 2020 that item is about $25 million again that relates to increases in the share price.
We anticipate that there's a potential for some fall over of that amount also into 21, but of course it relates to movements in the share price from here.
Given the volatility of market. So recently, it's obviously hard to produce predict share prices.
But that's something as you keep in mind as well.
Got it is or normalized ratio to EBITDA or adjusted net income that you target for cash from ops conversion from free cash Jetsuite. Adjusted net income, we should probably run pretty much in line in 20, I would hope for yes, some slight.
Positive leverage.
21, we anticipate that will be a really very solid year for cash flow.
Okay. Thanks, and then on margins just in regards to kind of the medium term, 10% target. If you could give us some update there I mean is that something that you think you can hit in both segments.
Obviously continued margin expansion in 20, despite I think you mentioned much higher R&D, So maybe where you stand on being able to hit that either as a total company or within each segment.
Yeah, we are original.
Goal on that which remains as it within three years, we would be.
That 10% we were on track for that we think that federal solutions has got the ability to get to 10%.
2020, the late 2020, some or certainly by mid 21 and critical infrastructure, we're probably looking more like mid 21, maybe as late as early to mid 22, and so Parsons Corporation and the total we would think into 2021 timeframe or as late as mid 22, which would put us three years from the.
So we think we're still on track for that Gavin.
Got it thanks.
Thank you.
Our next question comes from Edward CAISO from Wells Fargo. Your line is open.
Good morning, Thank you.
Can you talk a little bit about what plans you may have put in place and what conversations you're having over the cope with 19.
Hi concerns at the moment. Thank you.
Certainly yet.
So to date.
Cobot 19 has not materially impacted our business.
There have been some travel restrictions that we've seen kind of overseas.
And we're implementing workarounds for all those.
Our response management team has been meeting daily since probably the first of February.
And wrap kind of evaluating this rapidly evolving situation issuing guidance.
We're monitoring all the external sources that that you and others are monitoring from government customers subject matter experts, we have restricted all traveled the level three countries, we've adopted practices in alignment with the CDC direction.
And although I think it's very difficult to predict.
What we're going to see over the next couple three months as we stand today.
We're pretty close to.
All systems normal obviously were restricted some travel and improved.
The care the.
The cleanliness of our facilities in more disinfection and things like that but in terms of effecting operations. It has not immaterial today.
Are you hearing anything from your clients sort of stepping up their level of concern or are they getting ready and I guess, maybe one area I assume you have some skus and that's not worked and can be moved so are there scenarios, where you can work around that.
Well, yes. So this guests are split between our facilities and our customers facilities and obviously there are some flexibility in moving back and forth. Our project teams are working with our customer teams to look at work around should ace gifts be closed for.
Any reason.
As well as what work we can do from home are there are parts of classified work that are actually begun ducted into non classified facility and with the with the final work having to be done within its gifts. So all of those are the kinds of options workarounds that are being worked right now with our teams and with our customers.
Well.
We're also staying very closely tied out with our customers.
Through organizations, including professional service Council.
And AI and tracking the guidance that's been issued by opium Miss what the military services and the Intel community.
Last question can you talk about in the capital deployment pardon me.
Part of the model.
In the past I think you've mentioned using share repurchase maybe to offset some dilution option dilution.
Would you'd be willing in the current market to maybe.
Buyback stock cure.
Assuming you view your stock is attractive thanks.
Yes, so we're certainly aren't counting anything out at this point and we had again, our our jobs to do what's best to for our shareholders and and returns.
And we agree that.
Prices are looking.
So it's a good buyers market, we think right now so the share price looks attractive and that's certainly not off the table.
Thank you.
Thank you. Our next question comes from Cai von Rumohr from Cowen and company. Your line is open.
Yes. Thank you very much so Q4, it looks like the 40%.
Growth in federal solutions implies relatively narrow and sequential improvements in organic growth, which I assume would be Oh Gee. Since you are seeing were those items a little bit.
Behind trial.
Thats.
Thanks.
Yes, hi, Thank you so one of our strategies with Oh Gee systems by the way when she is doing very well was to not continue as a cedar caught seeda contractor.
With one of our intelligence customers.
And we instead focused on Replatforming, our contractual base to a larger prime role that that did require we had do win.
So new prime roles. There. These are really focused on higher margin software hardware development work that we think that is right in our sweet spot. So we knew that going in.
And we haven't announced it.
Publicly yet, but we've got a new multi hundred million dollar when it said that that was absolutely the right strategy, where we're going to be the prime doing hardware software development for that customer. So we did see a little bit of tail off as we walked away on the on the revenue from that those contracts in in Oh, Gee systems, but we're right on track with our.
Our projections and now celebrating a nice win in hardware software development.
Q Rcs results were slightly impacted by the continuing resolution spotted that.
Did slow down some hardware sales as well as the announcements you were coming out with some new products. So those products or be rolling out this year and we're very bullish on Q RC as well. We also had some critical when some of the legacy Parsons side and combined with our acquisitions, including the one that we announced last quarter, which lists.
And that command mission support contract for 590 million, we were awarded the vocals airfield job for 229 million other technical services support contract with classified customer for 175 million minutes heart contract with classified customer, which involves all of our acquisitions for 150 million.
And the lunch manifest system integration contract for 100 million. So we're seeing terrific wins across the board and almost every bit that were submitting involves all of our companies.
Super. Thank you very much so can you update us.
The outlook for four four GBSD.
Looking at this years will want to.
So.
Well, there's obviously still in their detailed discussions there's not going to be a lot to report Chi until later in the summer I think that the schedule calls for an August.
Signing.
So the scope of the underlying job hasn't changed our role is still consistent with what we thought it's been and everything seems to be moving forward is just going to take time, a few more months to get everything worked out.
With the Air Force and for Northrop sign a contract. We're also excited that they've added a that's held to the team and we partner with bechtel over many decades and so we're looking forward to working on other contract with them.
Terrific and last one follow up to its question on coal that 19.
Ultimately what percent of your employees work and Skus and what percent work at home.
And given that this looks like a much bigger deals and everyone thought a couple of weeks ago. This is changing your attitude toward towards M&A that you might want to wait to see if prices get lower or is this full speed ahead. Thanks.
Thank you Ed.
Yes, we don't report the number of people that work and Skus I mean.
That's that's information we can reveal.
It is not impacting our view of the markets.
I would think that most sellers.
We're talking to have a longer term view of the market as we do.
Obviously the them the multiples are down right now and so that may slow up some actions I would think in some cases in other cases it won't.
But in terms of our focus it remains the same scalable software hardware product IP associated with services in those fast growing markets, where that are key to our customers vital missions and we believe that since these missions our vital it between us and our customers will come up with workarounds and methods to keep moving forward.
Yes.
Just could you see what percent of your employees work on slide roughly what percent you know.
Has potential to be able to work at home.
What I can tell you most of the vast majority of our employees work.
Not in customer sites, they work in our offices or from home already.
And we have the ability to move more folks to work from home and connect and we do have people to work remotely on all types of our contracts both in federal solutions and critical infrastructure.
Thanks.
3600, apart employees, so that the 16000 or Claire so the remainder have a lot of flexibility.
Right.
Thank you.
Our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.
Hi, good morning, everyone and thank you for the time.
I had a question on federal solutions. The margins were above 10, EBITDA margins in Q3, and then down to 8.5 can you talk about how we should think about that business in 2020, maybe mix as you're winning new contracts. If you could elaborate on just yeah, there's been a little bit of volatility within the profitability of that business.
Yeah, although volatility as you referred to as Sheila in that is really had to do with when we book award fees and some incentive fees and so in any one quarter can be up a bit.
It's not due to underlying operational performance issues. So our estimate is for continued steady increase in the margins of that business as the new work that we are bidding the new software and hardware development work that we're performing in selling those are all at a materially higher margins.
Than our historical work. So we think that will just continue decline that we've been talking about we see a continuing on that same trajectory.
And there could be in any one quarter, we could have a higher number because we we recognized.
The larger than anticipated award fee.
Thank you and then we didn't critical infrastructure can you is there any way to size the program Rolloff and how we should think about new programs rolling in that have higher margins in that business.
For 20, yes.
The programs that have been rolling it have been pretty consistent.
You know for the last 18 to 24 months the work is all.
At or above the margins do that Weve you know the 10% margins were looking for so we'll continue to see a roll off.
Through 2020.
Thats part of the reasons why the revenues are down we don't view that as a negative that was part of our strategy. As we said over three years, we think will be relatively flat, but as those revenues went off to carry lower very low margins were replacing those.
With with contracts that have much richer margins and with less roll off cost that kind of results in a in a reduction revenue in 2020.
So.
George anything that you'd like to add to that answer no.
Yep Okay.
Okay. Thank you and then carry one for you in terms of on the cyber business I think Chuck might have mentioned pretty high win rates, 90% to 100% anew when the big contract in Q3, and I think for additional ones in Q4.
How is this were different than what you do or I guess, what was the competitive edge or the can competitions that has that changed and who you are going up against in these types of award.
So I would say the competition is pretty consistent what's changed for us This Atlas sessions.
Starting with Polaris Alpha, which brought in additional on data analytics capability artificial intelligence capability, coupled that with our high speed processing capability that we had at legacy Parsons our specialisation environment.
With O'shea systems, bringing the geospatial intelligence and QST with the RF spectrum. We now have the ability to provide end to end more robust solutions and thats enabled us to bid win large prime contracts like the CMS for a 590 million.
Okay. Thank you.
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Thank you and again, ladies and gentlemen to ask a question. Please press Star then one now.
Our next question comes from Joseph Denardi from Stifel. Your line is open.
Hey, good morning, everybody.
George just maybe put sorry to beat the dead horse, but the guidance does not assume anything related to covert 19 is that is that fair.
It is correct checked indicated we really haven't seen any notable impact yet.
The mitigation.
In general over at flexible workforce already developing contingency plans. If we have large number of people who need to work hopefully so we do not anticipate any impact.
Okay, and then just on the infrastructure side I think there were some work that that you guys were lower margin work that you guys wanted to let roll off can you quantify maybe how much of a impact or headwind that is two to 2020.
Yes in terms of.
You know numbers I don't believe we've given numbers on that.
What I can tell you. It's it's been in our plan from the beginning.
And John.
These were just contracts they have large amounts of lower to no margin subcontracts in them.
And.
And their completion date, you know range through the year pretty equally and that's where the reduction of revenues coming but it's also why we're seeing the increase in the margins.
Okay, and then I think in your in your 10-K or the registration statement at least the S. One you guys did use to disclose how much of the a and what your incentive fee recognition was how much of the target or potential incentive fee that that had been can you give us that for 19.
With that was.
I would tell you Joe is very comparable with what we've seen historically there was the one.
Very notable outsized.
In addition in the third quarter relative to a project in federal solutions, but but it's it's on par.
Okay, and then I'll chart 20 to 19 Yep Yep Yep.
2019, Okay, and then just on the on the cyber part of the business I know that that's maybe an area that you guys are pretty excited about can you talk about what the pipeline there.
Looks like.
Whether that's a an area of time and kind of M&A focus for you all.
Maybe just kind of what you're seeing in that market. Thank you.
Yes. So the pipeline is it does remain a focus and we think of cyber in on as it pertains to our pipeline.
We actually look at cyber from several verticals within cyber Theres. The software development component that we're very focused on there's the corresponding hardware whether it's the high speed processing is carry referred to the RF signals geospatial data capture.
There's cyber now resiliency required in some of the space critical infrastructure. So those are all areas that we're looking at as it relates to cyber all focused on the federal government. We were not we're not looking first commercial cyber now lot of that Cibers, we said in the past.
We believe has direct applicability to our critical infrastructure customers, especially those that operate rail and transit systems water systems.
Smart cities applications. So those remain in our critical focus and it's a robust pipeline in that area celebrate I'll, let Chuck said, we have 16 billion total qualified pipeline. We have just to clarify that bid pipeline versus M&A project, we have.
The pursuits that are over 100 million in contract value within the cyber domain, we up over 10 pursuits that are over a 100 million in contract value that spans customers from the intelligence community and that department offense and includes both offensive and defensive cyber then if you add in our space pursuits, we have another.
Six that are over 100 million on contract value and most of those include a cyber element.
Okay can I just ask it in terms of how much of the current businesses cyber versus how much of the pipeline. The qualified pipeline is cyber.
It would be roughly.
Thanks.
Yes.
Is the current.
Both.
On both.
Probably what we're seeing and cyber is.
It is.
More is a room transformation of the type of.
Opportunities becoming.
Larger and scale I think thats the single biggest thing that we're seeing.
Joe as that you could look as a trend in the cyber and Intel business for us and much more technology focused.
That's helpful. Thank you.
Thank you and again, ladies and gentlemen, I asked the question. Please press Star then one now.
And our next question comes from Tobey Sommer from Suntrust. Your line is open.
Thank you mentioned your prepared remarks, increasing your R&D spending can you describe that and what the trajectory may be over time and or whether its internally funded or customer funded.
In parts. Thanks.
Yeah, I'll take that into in general they'll have carry provides more details that Toby. So we have our own I R&D budget and Thats, what I was referring to that increased significantly in 19 and almost doubling in 20.
That is all in our federal space are predominantly in our federal space not exclusively in our federal space, We do small I R&D in our connected communities applications as well.
On.
And then we augment that with customer pay for R&D and OTI Ace. The other transaction agreements. So when you put all of those three together, it's a pretty sizable R&D budget some of which we are investing in some of which are customers investing in some of which are OTI A's carry perhaps should give a little color.
Our on some of the exciting things that we're investing in R&D sure check so we've doubled our research and development budget as we go into this year.
Sure I see technologies is going to be a big focus as we're coming up with some additional products and product enhancements. We're also investing in smart cities applications, developing Ida dashboard application and applying artificial intelligence within our cyber area, we continue and invest in high speed data processing, we feel that we're the leader in that area.
I understand the leading edge as well as vulnerability research on and then we're investing in some of our product technologies, which include our Pearl detect system, our Pearl Flash systems for intelligence surveillance and reconnaissance.
Thank you.
You. It was hopefully size cyber could you do the same for.
The space domain and.
Maybe not just currently but how you see it playing out over time given the.
Given the spending increases thanks.
Yes so.
Talking about space, that's an area that we've been playing in a long time in terms of focusing on.
Yes, a lot of those budgets that we refer to our classified budgets. What we can talk about our the number of launches that we're supporting whether launch manifest integration and last year. We conducted one this year that's.
To plan to plan this year and increasing steadily over the next three or four years.
And that's really a new area that there's we're kind of the.
From leading leading the charge in that regard and invest in our new high Bay facility in Torrance, California support that business.
Also as we mentioned the impact of Hypersonics, which will probably have some impact on space. The satellites that are used to track.
Hypersonic threats and can and to help.
Launch counter hypersonic responses.
As well as the cyber and it worked is required to protect the assets that are already in space and those will be launch that's an area that we think it's just got a tremendous growth that will come after it as a as both the defense and and probably on the commercial side, although that's not really an area, where we're playing right now.
Thank you.
And we'll take a follow up question from Joseph Denardi from Stifel. Your line is open.
Yes. Thanks, just just one last one from me I don't think you guys have any direct exposure to the energy markets that correct me, if I'm wrong, but just given what's what's happened. There recently do you see any customers are markets that that could be kind of indirectly affected.
Bye bye that thank you.
Thanks, Joe No, we very little exposure to the energy markets.
Most of the work that we do for them as an environmental cleanup and remediation.
Work and sub optimization, it's it's a very small piece of our portfolio.
And.
Don't see a lot of impact from that and domestic United States I.
I think the area that we're watching closely and where were working on the most sensitive projects and have seen these kinds of ups and downs before with little impact is dark customers in the middle East whose.
The government's revenues, obviously come mainly from oil and gas, but as we witnessed in the global financial crisis and prices going up and down in the past that really critical infrastructure. We work on has been a relatively stable spend in the past and we don't foresee any major changes in that through.
Through this.
Patch of volatility in energy prices either.
Thank you.
Thank you.
That does conclude our question and answer session for today's conference and I'd like to turn the conference back over to Dave Spille Lee for any closing remarks.
Thank you and thank you for joining US. This morning, you have any questions. Please don't hesitate to give me a call. We look forward to speaking with many of you over the coming weeks and with that will end today's call have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the programming you may all disconnect everyone have a wonderful day.
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