Q1 2021 Perspecta Inc Earnings Call
[music].
Good afternoon, and welcome to the perspective first quarter fiscal year 2021 earnings call.
All participants will be in listen only mode.
Would you need assistance. Please the ball conference specialist by Christmas Starkey, all the funds Europe.
After todays presentation, there will be an opportunity to ask questions.
Please note that is being recorded.
I would now like to turn the conference over to Michael PC.
President of Investor Relations. Please go ahead Sir.
Thank you and welcome everyone to our first quarter fiscal year 2021 earnings conference call participating on the call today, our Matt Curtis, our chairman and CEO and John cabin <unk> our CFO.
This call is being webcast on the Investor relations portion of our website respected dotcom, where we also have posted the earnings release and financial presentation slides with supplements our comments today.
Turning to slide to the presentation before we begin please note that during this call will make several forward looking statements that are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from anticipated results.
For a full discussion of these risks and uncertainties. Please refer to our FCC filings, including our latest form 10-K. In addition, these statements represent our views as of today and subsequent events may cause our views to change. So we may elect to update the forward looking statements, we specifically disclaim any obligation to do so far.
Finally, as shown on slide three well discuss some non-GAAP financial measures that we believe provides useful information for investors to slide presentation for today's call includes reconciliations to the most closely comparable GAAP measures at this time, it's my pleasure to turn the call over to Mac will begin on slide four.
Thank you Mike and thank you all for joining us this afternoon.
I'm very pleased with respect to performance in the first quarter fiscal year, 2021, which exceeded expectations on all our key financial metrics.
Today I want to share for key messages first I'll provide an update on the steps we've taken during the ongoing transition back to normal as a result, covert 19, along with some remarks about our corporate culture and foundational principles.
Second we'll review the strong start to F 121, as demonstrated by our Q1 results.
Third well outline our continued strong performance from a business development team and for all.
I'll provide some additional detail on our three year pipeline.
Turning to slide for the first let me begin by once again expressing our heartfelt sympathy for everyone who's been affected by covert 19.
As a company our first priority is a health and safety our employees an extended workforce.
During this pandemic. The work we perform has been named critical infrastructure in the central the National Security and we have effectively manage through the disruptions to our business. We've implemented extra precautions to ensure our officers remain open to support mission and business critical operations.
As we anticipated on the last call the impacts we felt mainly in our intelligence group.
In addition to the revenue and profit impact, we're starting to see program starch and deal flow delays will then the intelligence business.
We're monitoring the situation at this time believed that our original estimate, but a co the Nike an impact on our business is sufficient.
And John will address our outlook in his prepared remarks.
As we approach to end of our fiscal first quarter, we began our processes transitioning back to the new normal what we call P. too and you.
Our dedicated team has developed a framework to transition safely and over half of our sites are now operating at less than or equal to 50% occupancy.
And this comprehensive framework is designed to support a phased transition strategy implementation given a complexities of a geographically distributed workforce and variable state by state regulations.
We have developed an approach to teach you add to standards that is Taylor both per multi tiered guidance.
We're taking a state by state site by site program by program approach to our transition plans considering the white House CDC.
Oh agency standards state and local orders and customer direction.
These plans include standards for social distinct physical separation of work spaces personal health and safety cleaning of sanitation and other measures.
We have also develop perspective specific corporate policy on masks and an approval process returning to the office.
These are being reflected in plans in check list for every state and side, where we do business today.
We remain dedicated ensure the safe harbor employees, while continuing to meet our commitments to support our customers Mitch.
Now before we dive into the discussion about our financial results I want to address a broader topic that is top of mind for every American in light of the recent ongoing protest in response to the tragic death George for it.
We traded our company purpose in corporate value two years ago. When we launched perspective. It is not by mistake that respect is the first value on our list five.
Now, they're all important to our success, but respect is the cornerstone of our culture in everything we do here. It defines how we behave and interactions with each other and our customers and makes US good corporate citizens in our communities. So let me be clear.
Our board of directors and management team stands United and our belief that racism discrimination hatred and bigotry have no placing society or in our workplace. We have the obligation in the opportunity to ensure that every perspective employed can achieve their full potential by being treated with respect and dignity every day.
And given equal opportunities in a safe and supportive environment.
As you leadership and management team, we will stand for nothing less.
Moving to our second Gms it for you today.
We continue to consistently deliver on our gross margin earnings per share in cash commitments.
Revenue was up slightly year over year, adjusted EBITDA was 167 million and adjusted diluted EPS was 47 cents consistent with our expectation and includes the impact of cobot 19 in the quarter.
Free cash flow conversion rate for the quarters again above our full year target at 134% adjusted net income.
With the strong execution during these challenging times, we're off to a solid start and therefore 21.
Third bookings were strong at 1.2 billion, representing a book to Bill ratio in the fourth quarter 1.1 times.
This continues a positive strength across our book to Bill ratio for the trailing 12 months is 1.4 times.
I'm very proud to share that 53% of our bookings this quarter represents new business for Perspecta.
Excluding Amgen Smith.
Our book to Bill ratio was 1.3 times and new business represented 53% of that number.
And our trailing 12 month book to Bill ratio was 1.5 jobs.
At the end of the first quarter. Our total backlog was 13.5 billion and our funded backlog and ended the first quarter was 1.9 billion.
Excluding Amgen Smith total backlog grew $400 million over the prior quarter.
Our business development team continues to perform very well and I'm excited with some of the key award real quartered and our defense and intelligence segment this quarter.
During the quarter, we received multiple awards on classified systems engineering integration programs supporting various U.S. government customers.
The total potential contract value of these awards is 370 million with appeared forms of up to eight years.
With respect to labs was awarded a darva prime contract for fast network interface cards fast Nick arch is the name of the program.
The objective of the fast next program is to speed up complex computing applications, such as the distributed training of machine learning classifiers.
And video analysis applications by 100 times.
The development implementation integration and validation of innovated networking approaches.
Perspective Labs research design develop and demonstrate new network interface hardware that operates at 10 Terabits per second speed and the associated system and programming software to management utilizes new hardware.
These machine learning applications being developed have brought the chance were further deployment across the department offense and other government agencies.
And this award represents new work for the company has a total ceiling value of $37 million and a four year period to period of performance.
And our surveying and health segment, we were awarded you're not U.S. Department of Homeland Security, New data center to support services contract.
We will provide DHS headquarters and authorize components with full scope managed services, including baseline data center hosting and engineering services as well as application assistant migration planning and execution sport.
The indefinite indefinite delivery indefinite quantity fixed price contract a two year base with two six month option periods and a ceiling value of $112 million.
We're also selected to continue supporting the federal student aid customer contact center.
Under this program, we handle inbound inquiries from students parents schools and other stakeholders addressing issues related to the student aid application process.
And these interactions are handle via voice web chat and email and a great example for prospective applying technology and people to support a key mission of the Department education.
This fixed price contract as a base year.
One year option and three additional form on the options for a total period of the forms of three years and a total value of $98 million.
Looking ahead, our three year qualified pipeline remains robust as $75 billion, including 13 banner proposal already submitted and awaiting decision, which is heavily weighted towards new business.
Now I want to walk you through our pipeline, providing some insight into the makeup of opportunities.
How they fuel our growth.
The type of opportunities how they allowed a corporate strategy and how these opportunity drive and support our margin profile.
And finally to highlight two senior leaders, who recently joined perspective.
As we've stated previously our pipeline continues to be dominated by new work.
We've been through a heavy recompete cycle now, having a much lower recompete risk, which will enable us to focus on these new business opportunities to drive organic revenue growth.
Our pipeline has a significant amount of enterprise I T programs driving transformation across the daily intelligence community and survey in markets.
The market is shifted and we're now seeing customers looking to secure capabilities at the enterprise level.
Hey, managed services or agile development constructs.
At this level IP has not seen as a commodity rather as the key enabler of emissions.
When we use the term enterprise I T. The object is really encompass hybrid cloud to the end mobile device then everything in between.
It means application modernization implementation to transform mission and business functions.
These programs are usually procured be a firm fixed price contract.
Our lineage and core competencies are fully aligned to support these objectives and buying habits.
As such our pipeline continues to be dominated by this deal profile and approximately 55% the pipeline as firm fixed price.
Now I want to focus on a program when for Q1 that highlights this environment.
We were selected for the development and deployment of the Enterprise Army training information system.
Under this program of record, we will integrate employment costs and got technology to drive transformation of the army training environment.
Specifically, we will develop integrate delivered operate and maintain an army wide system.
Our solution will consolidate 28 legacy systems.
Implement proven processes and migrate data into a single entry integrated cloud based system.
This will provide the army with a real time understanding of comment readiness with reduce cost and complexity.
We will drive cost savings through the retirement of duplicative legacy systems.
We will drive increased using experienced by providing single point of entry to accessing and completing individual training records.
Finally, we will provide a common operational picture, which will enable army leadership to better understand direct and assess training for both the entire army both uniform and surveying personnel.
This is a true transformation effort.
We will do under a firm fixed price contract, which represents new work for the company has a ceiling value of $237 million.
The attributes of the Ats, our what we see across the customer said and as market is looking to reduce spending on legacy systems leverage agile concepts and cloud technology, and allowing IP partners like perspecta to deliver capabilities under firm fixed price contracts.
The government does not see these programs as a commodity they see these are they will enable emission and business that they are favoring value when they pick their partners.
Market trends in customer buying habits within our pipeline dovetail perfectly with our offerings in solutions.
Combined with limited Recompete risk. This favorable makeup provides a foundation for and drives our confidence in our strategy.
And finally I'm pleased to announce student members, our executive leadership team this quarter.
Jennifer Sherman Dell and Dan into Pip on.
Jennifer has joined US as senior Vice President and general manager of the risk decision group.
She has a 20 plus year track record of creating high performing geographically distributed leadership team growing service lines of business and helping organizations as two processing structures to successfully drop and manage rapid growth.
Her background aligns directly to the growth objectives and strategy for already Gi and to further our trusted workforce to auto initiatives.
Second Dame into Pip has joined US as senior Vice President and General manager and the intelligence group.
Damian has held similar executive position with peer companies and has 25 years and a national security sector.
He has extensive experience and growth areas emission IP and analytic services with any intelligence community and will help enhance our strong foundation of systems engineering business to grow our presence in these growth areas.
These are is demonstrate our ability to track top talent across all levels of the organization.
We're confident that the entire leadership team as experience and expertise to execute the strategy we fine.
In summary, I'm proud of them forms our employees delivered this quarter, our ability to support our customers mission now and in the future offering solutions and play to our strengths to drive value innovation.
With that let me turn the call over to John.
Thanks, Mick and good afternoon, everyone I'm very pleased with our first quarter performance as we continue our quarterly trend of solid execution.
Turning to slide five.
Revenue for the quarter was 1.11 billion, which was up slightly from the first quarter fiscal year 2020.
And up 1% sequentially.
The results. This quarter include a 23 million coated impact.
Revenue growth, excluding cobot was up 2% year over year and up 3% sequentially.
In Q1, we also recognized approximately 14 million and revenue pulled forward from Q2 related to accelerated customer request on engine Smith.
Consistent with our disclosure from the last two quarters. We're also providing our results excluding impact of engine Smith.
Revenue excluding engine Smith was 894 million, which was as expected down 2% year over year and 1% sequentially.
Excluding the cobot impact revenue was up 1% year over year end up 2% sequentially.
The defense and intelligence segment revenue increased 3% year over year, primarily driven by continued on contract growth and new program contributions offset by cobot impacts and higher prior surged volumes related to background investigations.
The civilian and health care segment revenue decreased 6% year over year, mainly due to NASA and other legacy program wind downs, partially offset by continued ramp up.
On key new programs.
As a result of the momentum from new business wins over the past several quarters, we anticipate a return to growth in this segment in the second half of that by 21.
Overall, our contract mix was a little heavier in terms of cost plus in the quarter.
As a percentage of total revenue, 52% was fixed price, 34% cost plus.
And 14% time and materials.
Q1, adjusted EBITDA was 167 million and adjusted EBITDA margin was 15.1%.
The anticipated year over year decline and adjusted EBITDA margin is primarily due to lower asset intensity, an increased mix of cost plus programs and an 8 million kobin impact.
Excluding the cobot impact adjusted EBITDA margin was 15.5%.
Excluding engine Smid adjusted EBITDA was 144 million and adjusted EBITDA margin was 16.1%.
Depreciation for the quarter declined 18 million from the prior year to 35 million.
Acquisition related intangibles amortization, which is backed out of adjusted net income and adjusted diluted EPS was 61 million.
Q1, adjusted net income was 76 million, resulting in adjusted diluted earnings per share of 47 cents against a diluted share count of 161.7 million.
Adjusted diluted EPS includes a four cents impact from coated.
Excluding engine Smith adjusted diluted earnings per share was 37 cents.
Turning to slide six.
During the first quarter, we generated 132 million of cash flow from operating activities and 102 million of adjusted free cash flow for 134% of adjusted net income.
The difference between the cash metrics is $43 million of capital expenditures, which include finance lease payments and $13 million of separation integration and restructuring payments.
During the first quarter, we permanently paid down 26 million of debt and we also repaid 50 million of our revolver borrowings. We now have 100% of our 750 million revolver capacity available.
Additionally, returned 10 million to shareholders in the form of quarterly dividends.
Given the cobot environment, we temporarily halted share repurchases during the quarter.
We exited the quarter with 872 million of total liquidity, including 122 million of cash and 750 million of available revolver capacity.
At quarter end.
We had 2.5 billion of debt of which 2.3 billion is flexible pre payable.
With no refinancing and limited repayment requirements over the next several years.
Our ending net leverage ratio was 3.2 times for our credit agreement compared to our financial Covenant maximum of 4.5 times.
In summary, we maintain a solid balance sheet substantial liquidity and strong financial flexibility.
Turning to slide seven.
We're off to a strong start to fight 21, and our reaffirming our roughly 21 guidance.
We expect revenue for the year to be 4.26 to 4.41 billion.
Adjusted EBITDA margin of 15% to 16%.
Adjusted diluted earnings per share of $1.90 to $2.03 and adjusted free cash flow conversion of 100% plus of adjusted net income.
Excluding the estimated impact of engine.
We expect revenue for the year to be 3.66 to 3.81 billion.
Adjusted EBITDA margin of 15.5% to 16.5%.
Adjusted diluted earnings per share of $1.60 to $1.73 cents and adjusted free cash flow conversion of 100% plus.
Implicit in our guidance is a cobot impact of 75 million in revenue and 20 million in adjusted EBITDA and an effective tax rate of 25% as we continued to drive tax planning initiatives.
Excluding engine Smith, we continue to anticipate year over year revenue growth during flight 21.
In conclusion, we're off to a strong start and apply 21, and we are confident that we're building a solid foundation for achieving both our short and long term targets.
Operator, we're now ready to take any questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question, Please press star and too.
At this time, we'll pause momentarily to assemble a roster.
And the first question today will come from Joseph Denardi Stifel. Please go ahead.
Hey, good evening everybody.
Mac you talked about the strong order activity in the in the quarter in the bookings are kind of evidence of that but you also talked vascular delays on the Intel side of business. So were you able to put up.
This this strong bookings quarter, despite softness on from the Intel customer or were they kind of also strong in the quarter.
Yes, no Johe area. This this is Matt.
Yes, it's a good question. So this is predominantly outside of the one award we had we talked about.
In a in the Intel community.
We have seen that slow that we've seen.
Not only the dialogue the RFP is any conversation about moving to awards has slowed down precipitously. So the bookings that we've had were predominantly and really in the other any other sectors, we defend Sunday in health primarily.
Got it that's helpful. And then John just in terms of the cadence of revenue through the year ex and Jan I mean should the expectation view that the first after the years is.
Under pressure just based on the background investigations, but then the back half should be you'll be growing double digits in the back half the direct Sanjay that right.
Yes, Joe Thanks for the question. So as you pointed out when you kind of take a look at Q2, right, obviously as you're well aware, we've got some material year over year headwinds you know what obviously, we did a year ago with NASA with the asset sale.
To be high volume search that we're obviously successfully addressed and than we had a 14 million pull forward. So excluding engine Smit. We're certainly give me returning to very strong growth in the back half of the year I'll. Just also comment we're very pleased with the strong performance in the continued momentum and what we're doing this in the business development Arena. So.
So you should be turned taking look at kind of the rest of the year.
That's helpful. If I could just sneak one more and Mac just on the on the on the on the acquisition DCH. The if not a huge contributor to sales but.
A few points, but when you look at what that offer says that increase what you can bid on going forward or does it increase the likelihood that you can win which you were planning to bid.
I think Joe it's a couple of things when you look at a deal like that and I'll start from the top it puts us in it and kind of and new markets, where we do a lot of applied research and cyber security and our innovations and so what are they exist and also the contract we won in the defense group with our side.
So we are absolutely USCYBERCOM additional applied research now what this helps US do this extends our ability to help.
Government.
Protect and integrate our sensor systems electronic warfare with cyber security and the Army is certainly a leader in that and the weapons systems perspective, we seen is manifesting itself into the air force as well as into into the Navy. So this extends our ability from doing applied research to the engineering side Thats in driving innovation.
And actually fraud riding limited solutions to the to the Warfighter in terms of he warfare electronic warfare centers, and we see that again propagating itself throughout the defense establishment. So that's what it doesn't it's a big there a strong player in the arm around really excited about leveraging that business and the defense group as well as perspective.
Yes.
Got it thank you.
Thanks, Joe.
The next question comes from Gautam Khanna with Cowen. Please go ahead.
Go ahead golf Engraft. Your line is muted on your end your line is open.
Hi, Coppin, we're still unable to hear you a woman who onto our next question, but before we do that as a reminder, you have a question just press Star then one on your phone.
Our next question will come from Gavin Parsons with Goldman Sachs. Please go ahead.
Hey, good afternoon.
Hey, good again.
Yeah, Matt you mentioned the pipeline is 55% fixed price with and I think that's consistent with your revenue mix today, or maybe even a little bit better.
Part of the long term margin guidance revision was that you were anticipating some mix pressure. So there was that 55% fixed price also true of your backlog today and is that potential upside to the 15% to 16% guide.
Yeah, I think when you look at the pipeline just to make sure. It's not all impair our main we looking at the $575 million product. The next three years, we look at that to make sure. We've got the right mix. It doesnt necessarily mean, Gavin that we'll bid all 55%, but we have that opportunity analytical right and you go back a couple of quarters than we had about a billion dollars are there.
Opportunities that we won new customers as you recall state labor and yes Senate well cost plus now this quarter, we added roughly half a million that we're all firm fixed price. So so I think it's kind of a guide post to look at it.
So it's not empirical data, but we do see that opportunity and it's all about the guidance. We provided with regards to go forward between 15 to 16.
Yes.
Great. That's helpful. And then I thought you made a really interesting comment that the other customers, placing more value on IP and seeing it was a key enabler of mission.
How has that changed kind of relative to the last time, we saw a budget cuts and do you think that could insulate ITD better than if we have budget cuts of that can insulate IC better than that we saw last time around.
Well I think one of the things that we want to make sure. There's a difference in and that made the comments are making is different than what we used to call kind of.
Enterprise the IPO right, Andy I see outsourcing, where it was managed services from the desktop and those kinds of thanks, That's a little different then then and what we're talking about here what we're talking about here is a real transformation Gavin where you're going from this client server environment to cloud computing with unit cloud computing you also asked.
Application transformation and you have to have everything associated with it so they're looking at that more holistic transformation going forward. So and it's critical that you have to run the operation why you're doing this transformation and army contract is a perfect example, so the customer looking and saying hey, all by the way I don't necessarily want.
On all these assets because we're operating in the cloud I'm looking view to comment and help me put a roadmap together to go from where I am and it could be on Prem often data center client server to get me to hybrid public or private cloud. So it's a little more complicated than just the old IP outsourcing and everybody is used and we had really kind of.
It's kind of an appetite of change in awareness and they're looking at this is a real value add its not about Mike laptops, and desktops and just putting in place. This is a real journey with the customers and you think about customer by homeland security, who thousands of applications. So you'd all go from on Prem all from data center overnight.
So a private cloud theres a lot if it happens in between so it is very complex. It takes a lot of enterprise architecture.
And that consulting OSAT I think heading into the operation. So the whole point of that is that's really in our sweet spot Theres a lot of that work in his firm fixed price and that was the point. So you do not exactly the right point, we want to lay out there isn't there a lot of opportunity in the pipeline. There are like that and are big that are 567 years that are.
Multi hundred million dollar opportunities. So are you thinking about an right way, but is not a commodity because you've got to try and architecture. The consulting on the right cloud application migration all the way to the operating environment is that helpful. So it's a it's a long haul and it's very complicated it takes a lot of capability set they'll renew that.
Yeah. That's that's really interesting that would you say, we're kind of the early innings or kind of starting up a bow wave of that or where are we kind of in terms of.
I think with again the started about a year ago. Gavin you know when you think about you know some of these as a service deals are you thinking about what the Army's doing as a service airforce is going as a service when you talk about this or the enclave opportunity. These are all these these kind of real heavy list kind of architecture to operation transformations.
Crossed kind of a cloud cloud environment. So so yeah, we're pretty excited about it when and having the right skill sets that we'll do that and the right past performance is is really important.
Great. Thank you.
No.
And once again, if you'd like to ask a question. Please press Star then one.
Your next question is conference call with Cowen. Please go ahead.
I.
Forgive me, if I missed that might might call dropped but I was.
I was wondering if you could talk a little bit about.
Timber in December quarters than what your expectations are.
The contract Adjudications, maybe talk a little bit about the outstanding.
Hi, Brian about outstanding bids.
And you know what you're seeing in terms of Ace Awards.
Then I have a follow so.
Yes, Okay software now starting to John they have some some AD got them. How are you. This is Matt.
So so I think you know if this unique Nicole good impact I think everybody in all the companies. It in a report you kind of see what's going on there historically this quarter is a big quarter, particularly for software and hardware buys. So I think we're seeing how that will manifest itself and this quarter I do think.
When we look at it from from that perspective, you. We've got about $13 million of opportunities that are pending award.
Now, we certainly won't see all of those in the next two months and we will see a moment extreme but there's a lot of opportunities that we're looking for with regards to two adjudication.
I also do think you know as you start to get back on line with some of the Intel's community organizations.
They've got a pace and they're going to have to keep to get a lot of things that when they weren't working that could it could get noting that are kind of a little slower and I made that comment earlier.
After with regards to.
The book to Bill we've had this quarter has been although there was one deal that was in Talbot was awarded a little earlier in the quarter on a lot of the entail some little slower just because they have been able to get to work.
So I think yes, manocept in the end of the government fiscal year, yeah that should be pretty pretty good and then and now it's part of a net what happened in December was less than a metal, but there's a lot being backed up there's a lot being backed up a lot awards. It has to happen lot of contracted standards that have to get done just to keep things move.
Okay. That's helpful and then well I mean as a follow up to that as you guys have any.
Sense of the 13 billion and how it shakes.
Between the intelligence agency.
And other.
Everyone else.
The entire color.
No I would say I can't give me that percentage by some they are assumed some some pretty decent size deals either probably three or four net around there that that.
Over course that May have gotten awarded this quarter that we expect either in the third quarter or the fourth quarter of calendar year, but it's pretty typical with regards to the size of the business and the backlog.
Sure.
No.
Correct.
Okay, and then I'm also curious and again forgive me if you've addressed that I'll bet.
You know just given the jail ruling you know a month ago.
Yes.
Big continuing profile.
How long they could take the transition offset if you don't prevail does that I know you have revenue going there it looks like your December but.
I believe it was a nine month transition.
I'm, just curious if that already winding down or.
Or is it sort of.
Got it extends beyond December 30, Onest, even if you don't retain.
Yes, well, let me give you assess what I can do is kind of Guinea chapter inverse of what happens GAAP in which we will answer your question with regards to the protest. So we had post Yale we get filed with the quarter Federal Flames and take that lightly and so what that means as you know we're giving all the.
Clarity, we possibly can every quarter on what has been as looks like without Smith, the and I think there's a great story, there as well as what it looks like with Mitsui can separated that so we are continuing right now about them to operate the contract. We are under contract as we said through the end of December of this year.
Now it's public at the Navy came out and said they want to basically have half of what kind of it as I.
Contract out for our discussion that would extend this contract.
The first of the year through June so, it's a six month contract extension and three one month options after that.
That was what the Navy put out and I can't go any more discussion about that because where we were working through with the Navy. So I guess the point is that if this happens, which we believe it or will that is feasible that we've been contract for the end of June at the Navy. The slot three one month option. So given the option to August September.
So I can't comment more on that as I just on automobiles. So Jonathan I guess I think that's exactly right and certainly as Mac laid out our guidance includes through December because that's what we're contractually obligated for in rule as we obviously finalize details with the Navy we'll update appropriately.
Impacts moving forward.
Okay. Thank you and one last one.
I'm just curious if you could talk a little bit about the M&A pipeline.
Is there anything of a.
If it interesting are you seeing good properties or the multiples to high enough just kind of trying to think about how we should think about cash deployment.
Over the next years, though.
Yes, So John will talk about capital allocation to raise I'll give you kind of what we see exactly from from M&A side feature I'm sure. So overall is I kind of laid out in my prepared remarks, we feel very good about our liquidity, our very strong financial flexibility so relative to capital allocation right now again.
We continue to progress approach should very balanced we're certainly reinvesting in a business accelerate organic growth will continue to deleverage the balance sheet and we are returning capital to shareholders, obviously with our dividend payment. We did temporarily hold share repurchases given the coven environment, but it certainly part of our obviously long.
Return on capital allocation and then as we've said from day, one we're continuing to look at strategic acquisitions. We're looking at obviously continue to enhance capabilities.
Customer access so we run a pretty you know a rigorous cadence there. So we feel very good about again, our position right now our flexibility our net leverage right. Now is 3.2 times. So we feel very will very very well position here with good firepower and so got them I do think.
Over the last that 60 to 90 days.
Some deals are getting now, but it has slowed precipitously so I do think.
The net net there there will be demand and I think supplies have been a little slow I think you'll start to see that pick up I mean, the obvious question people are in their mind is is there going to be SCR, what about the chairs, 36% extension, which in our market space is really important. So I think once those get cleared up a little bit right I think you'll start to see it starts up.
Pickup and I do think there there is kind of money money building up on the sidelines I think there's an appetite you know, it's we just need to see pupil Tuesday to put their properties on the markets like the housing market right. They just did not have properties out there. So I do hope it will pick up see what do we see.
Some but probably not really what we'd like to see and hopefully next 60 90 days, we'll see pick up where it's been pretty slow.
Thank you very much guys.
Hi, guys got five safely yes.
And our next question is a follow up from Gavin Parsons with Goldman Sachs. Please go ahead.
Hey, Thanks, guys, John just wanted to touch on the covert impact.
The 23 million in the quarter relative to the 75 million for the year.
It sounded like things are kind of starting to get better here any reason to expect that that 23 million headwind should start to decline sequentially as we go forward out there.
Yes, so I would say right now certainly situation is fluid. We're obviously closely monitoring it we will continue to assess impact on our outlook right now we feel very good with our guidance.
All along we thought the impacts in our business would be more prevalent in the first half of the year. So this is inline with what we are thinking was that we communicated on the call last quarter again.
Okay, great and what were the cash flow impacts if any kind of to the quarter to the year and then you know if you had NIM deferred payroll taxes unwind over the next year too.
Glad you brought that up we're very very pleased with our continued very strong free cash flow generation thing as you know with industry, leading conversions and yields just very solid working capital management.
Clearly, we did benefit from the employee payroll tax deferral under the care Act provision in the quarter, which was already built in our guidance. We feel really good about where we are we do a very good job in terms of.
Well billing in very timely collecting so feel very good about where we're at right now.
Got it okay. Thanks very much.
Right.
And the next question is also will follow up and Thats from Joseph Denardi with Stifel. Please go ahead.
Yes, Thanks, John just.
Along the lines of M&A, where do you feel comfortable taking leverage within transaction.
Sure sure. So again, we ended the quarter at about 3.2 times net leverage per our credit agreement.
You know will always continue to be very responsible and disciplined here really our focus is driving our strategy right. So along those lines were continuing to look at adding capabilities enhancing capabilities getting obviously for their customer access. So again, we would always be taking look at all.
For threes, and I would be comfortable on a temporary basis at four times net leverage for approach agreement, but I'll stress will be very responsible and disciplined here and we work this very hard.
Okay, and then can you just talked about maybe and maybe I missed it the nature of the cobot impact where we're in the business you're seeing it is it.
Our investigations and then is that the expectation that you recover the revenue and EBITDA next year or is it was it more lost than than delayed. Thank you.
So I'm going to turn over to John just saying, whether you're not at the top level, Joe how we've been very fortunate and last call. We talked about hundreds of people that not thousands, but a 101 hundreds of people that couldn't get into that in the billings and the intelligence community and so that's a beta bit.
You know so we're right and from that part of education to what we do for center for Medicare Medicaid services. All of that is deemed mission critical. So we're all working I would tell you. It's it's probably a couple of hundred people at this point that are easy to shift work or cannot get into the building. So we met started to come down precipitously. So.
No we are working and Thats and where we're really very fortunate in that regard so and we see that getting by John said that a half our facilities are opened it very careful right as we're all over the country.
Our opened and probably a third of our workforce battleborn more to sort of opus is kind of in the office, but we're fine all guidelines. So we're one of the first of new temperature standing and on an almost all facility. So we remain very carefully so.
From a high level of management perspective, as we talked about and the remarks, that's kind of where we're headed.
And again, where we've got a few hundred people that are impacted but thats really at John.
Yes, it's the spot on and the impact that we are seeing is primarily on Joe in the until business as you would suspect as we've talked about before but the Max point I think we've worked is very responsibly we've.
On a nice job from a remote perspective, and we're handling this very very well right now and feel good about again the guidance and the numbers that we put out there for you.
Okay next quarter.
Thank you Joe Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Michael PC for any closing remarks.
Thank you. Thank you all for joining us today and for your continued interest in perspective, and we look forward to speaking with you again next quarter have a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Thanks.
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