Q3 2020 PAE Inc Earnings Call
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Ladies and gentlemen, today's conference just comes to begin shortly please continue to standby again todays conference is 'cause it to begin shortly please continue to standby and thank you for your patience.
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Good morning, ladies and gentlemen, and bookings a P.A. <unk> third quarter 2020 earnings conference call.
My name is Chris and I'll be your conference operator today.
It's called is being recorded.
I would like to turn the presentation over now to your host for today's call Mark <unk>, Vice President of Investor Relations for P.A.
Please go ahead Mr. Jim.
Good morning, and thank you for participating in P.A. <unk> third quarter 2020 earnings announcement.
We hope Youve had an opportunity to read the press release that we issued earlier. This morning. We have also provided presentation slides on the Investor Relations section of our web site.
Joining me today to discuss our business and financial results are John Killer T A's, President and Chief Executive Officer, and Charlie Piper, Our Chief Financial Officer, Bob.
Following our prepared remarks, we'll close with a question and 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 SEC filings.
Please refer to our earnings press release for P.A.'s complete forward looking statement disclosure, we do not undertake any obligation to update forward looking statements.
Management will also discuss non-GAAP financial measures during this call.
We remind you these non-GAAP financial measures are not a substitute for their comparable GAAP measures.
Reconciliations of these non-GAAP financial measures to the comparable GAAP measures are contained in the press release and Investor presentation is issued earlier today.
And now I will turn the call over to John Hello.
Thank you all for joining us this morning for our third quarter.
Earnings Conference call.
I hope that you and your loved ones are safe and healthy in these challenging times.
And thank you to our employees, who through their dedication and perseverance throughout the pandemic have delivered strong performance, while dealing with various challenges the year is presented.
For the agenda for today's call I'll start with the key highlights related to the third quarter and move on to a discussion of our perspectives on the long term federal budget outlook, followed by an overview of our strategic growth initiatives.
Starting with our third quarter results.
I am pleased to report we achieved 1.4 billion in net bookings were 2.1 times revenue.
We generated revenue inline with our expectations and adjusted EBITDA and margins exceeded expectations.
Furthermore, we delivered another strong quarter of strong free cash flow.
I continue to be very excited about how the business is performing despite the challenging backdrop, we're delivering strong financial results and achieving our growth profitability and capital structure initiatives in accordance with our strategy.
Based on our results through the first nine months of the year, we are maintaining and narrowing our revenue guidance reiterating our adjusted EBITDA guidance and we are increasing our free cash flow guidance.
And our first earnings call as a public company in March of this year I provided our top three priorities driving topline growth expanding profit margins and lowering our cost of debt.
I'm proud to report that we are delivering on all three of these priorities. The business is generating strong margins that are exceeding our original guidance and following the ended the quarter, we completed a well received an attractively priced.
Debt refinancing.
Following the successful debt refinancing, we announced a signed purchase agreement with centric technology.
A leading provider of intelligence and National Security mission support.
We will continue our relentless focus on driving growth and profitability and generating value for our shareholders.
Now I'll turn to an overview of backlog and bookings.
As I mentioned, we generated 1.4 billion in net bookings for the quarter and 2.8 billion on a trailing 12 month basis back.
Backlog improved to 7 billion and normalized with the U.S. customs and border protection or CBP Award previously protested backlog would be 8.3 billion.
In addition, trailing 12 month book to Bill improved to 1.1 times and normalize for CVP It would be 1.6 times.
Notable awards included the U.S. Navy integrated training environment initiative in which P. as a subcontractor to alliance science and technology to provide an integrated training platform.
This win is a great example of our focus to take the business up the value chain.
Our winning proposal focused on the Navy's vision of transforming to a live virtual constructive training environment, representing an innovative approach and operating test training range activity.
Additionally, our joint venture with Parsons was awarded the 545 million Naval Guam base operations support contract.
Following the withdrawal of a protest by a competitor.
This program has been in our contract portfolio since 2005 and is indicative of the stable recurring work. Our Gms segment is built on.
This program is firmly aligned with our strategy of continued U.S. Navy expansion as.
As well as the U.S. Navy Paycom AOL our mission.
Moving to COVID-19 response awards, our Gms segment was awarded an approximate 50 million dollar contract with the Navajo Nation to service the joint logistics and medical integrator for the Navajo Department of Health COVID-19 response efforts. This was on top of our Cobot response award with the southeastern.
Prince providing COVID-19 testing services for all in season fall sports.
These COVID-19 response contracts are a testament to our team's agility and the diversified capabilities, we deliver in times of need.
We have generated about $125 million and year to date coded response awards, helping to offset a portion of the Cove. It 19 revenue impacts this year.
Lastly, our NSS segment was awarded a 17 million dollar contract to deliver global capacity building initiatives to strengthen partner weapons of mass destruction interdiction capabilities through training and exercise events.
Next I'll provide a summary of the bid pipeline.
At the end of the quarter, we had about 7.4 billion in awards under evaluation split nearly evenly between new business and Recompete Awards.
We also have an incremental 1.5 billion in the proposal writing process, 100% of which is new business.
In Gms, we're awaiting about 6.8 billion in awards, which includes P.A. East previously awarded 1.3 billion CBP contract, which was protest.
Approximately $3.8 billion, our Recompete awards in about 3 billion or new business this opportunities.
In our NSS segment, we are awaiting about $600 million in awards, a little over half is new business in business process solutions and training related programs.
Next I'll provide a brief update on the 1.3 billion CBP Award.
As we previously discussed our 10 year $1.3 billion contract award with the U.S. customs and border protection was protest the.
The customer is conducting further evaluation of the award and we anticipate the award will be decided during the fourth quarter well.
Well, we won the award in May of this year. Our policy is to not take this award into backlog or bookings until the matter is resolved in our favor.
Now I'll spend a few minutes discussing the federal budget outlook and our strategic growth initiatives.
Starting with the federal budget outlook.
In the short term, we anticipate total discretionary spending may increase from co bid related stimulus, but flattened or slightly decline longer term.
However, our focus as a service provider is not on total discretionary spending but.
But rather on the outlook for contracted services.
We believe the federal government will continue to rely on contractors to perform mission essential services, even in a flat or slightly declining total budget environment.
In terms of our core addressable market, although the market is large we anticipate low to mid single digit percentage growth and higher growth rates across several adjacent end markets.
The focus of our strategic growth initiatives is delivering differentiated mission focused services to a diversified set of government customers in defense intelligence and federal civilian end markets.
And we'll execute against this strategy by utilizing a diverse global and agile workforce, coupled with strategic alliances with best in class technology and industry partners.
Our strategic imperatives can be summarized across two top priorities growing market share in our core business and expanding our addressable market.
Starting with growing market share in our core markets. The rationale is one our core end markets are large addressable markets with stable funding profiles.
Two contracts in P. Acnes core markets are typically longer in duration compared to many market areas and three the US government will have a continual need and demand for maintenance and monitors station of infrastructure, regardless of political outcomes and topline budget levels.
The continued primary focus areas will include training services mission oriented services and infrastructure operations, all well funded business areas with bipartisan support.
Moving to expanding our addressable market the rationale is straightforward one.
There are several current adjacent market areas that are expected to outpace piece current addressable market in terms of long term growth.
And to the government strong focus on innovation is creating significant opportunities for federal contractors and three these targeted adjacent market areas are typically higher margins compared to peace Corps.
Notable focus areas for expanding total addressable mark.
Market include intelligence analysis, which was strengthened through our recently announced signed acquisition agreement with Central technology.
Health support services and engineering services.
All examples of PE, moving up the value chain and continuing to diversify our business.
Next I'd like to unpack these adjacent market areas that provide additional growth options for P.A.
Intelligence analysis, a key core competency of Sentra represents an approximate 12 billion addressable market poised for mid single digit growth over the next five years.
This type of work requires extensive past performance and experience and represents attractive margin expansion potential for PA.
The second area Health support services is a 25 billion market overall with mid single digit growth potential.
The growth opportunity for PE is focused on leveraging our core capabilities with adjacent federal health missions.
Our expectation is that the federal health market is poised to see continued growth over the foreseeable future and PE is attractive past performance to leverage through its use AI deepwater Ebola support and current co bid response programs.
The third area of our market expansion strategy is centered around growth in the engineering services market.
Engineering services include the design installation and integration of systems and platforms for the federal government.
This work is a natural extension of our Gms and NSS existing work and allows PE to leverage existing customer relationships, while moving the company up the value chain.
The key variables in executing this strategy will be attracting and retaining top talent as well as continuing to build our strategic idea Q portfolio.
I've been successful expanding our idea Q portfolio organically and this is also an important attribute of the central acquisition.
We cannot control the federal budget outcome.
What we can do is build a resilient and diversified business model that can thrive and grow under any scenario.
We are accomplishing this organically and through our recently announced signed acquisition agreement with Central.
With that I'll hand, the call over to Charlie for an overview of our third quarter 2020 financial results and 2020 financial guidance.
Thanks, John and good morning, everyone I'll start with a high level overview of our third quarter results and then move on to our 2020 financial outlook.
Despite the revenue impact caused by cold, we continued to deliver on our commitment to expand margins and generate strong free cash flow.
We've been successful increasing margins and maintaining our adjusted EBITDA outlook as well as increasing our free cash flow forecast.
Through driving growth and higher margin business areas as well as managing cost and working capital.
As we mentioned on our prior calls the cobot impact has been felt most notably across three areas of our business.
First non labor revenue or the logistics operation of delivering materials items, such as food fuel maintenance parts et cetera has slowed considerably due to reduction in air traffic and.
In airport closures overseas.
And second.
We have been modest we hadn't seen moderate reductions unbillable labor, primarily due to certain training programs being rescheduled and to a lesser extent closures of government facilities.
Lastly, in the third area of Colgate impact as our business plan.
Which included certain assumptions for new business awards, our win rates have increased the mid 40% range.
For new business Adjudicated awards has been slowed.
These award delays that resulted in a portion of our anticipated new business revenue shifting into fiscal year 2021.
The year to date Cobot gross revenue impact was $125 million of which 74% is lower margin non labor related.
Partially offsetting this we have recognized $49 million in year to date coded response revenue, which generates higher margins than our consolidated results.
Yes.
In the third quarter, the gross impact of cobot impact of Covidien 18 totaled $53 million of which about 43 was non labor in approximately $10 million was labor related.
Moving on to third quarter results.
Revenue of 666 million decreased about 32 million below the same period last year due to the previously discussed 53 million COVID-19 impact.
And partially offset by $22 million in on contract growth and new business programs.
We delivered over $46 million of adjusted EBITDA at a 6.9% margin a healthy improvement over expectations for the quarter.
We continue to generate increased profitability on many programs in both operating segments.
Second.
Majority of the revenue decline is attributable to non labor revenue.
Which drives a lower profit margin.
Third we are managing cost.
Efficiently through reduction in SDN expenses, and lastly, we are generating incremental margins.
Relative to the consolidated results on our Cobot response revenue.
Our adjusted EBITDA for the third quarter backs out roughly $7.8 million of operating expenses.
Approximately $4 million as related to equity based compensation expense.
And the remaining 3.8 million relates to M&A expenses associated with.
The announced acquisition and nonrecurring public company readiness set up costs.
Turning to the cash flow statement.
Net cash provided by operating activities was nearly $37 million for the quarter.
Reduction in cash flow from operations compared to the prior year period.
Is solely due to timing of cash collections in 2019.
Following the end of the government shutdown.
DSL, which was 62 days for the quarter continues to outperform our historical averages.
This is a direct result of the emphasis we place on managing Dsos throughout the company.
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We remain highly focused on DSL will continue to implement process improvements to drive the DSO, even lower moving forward.
Capex was approximately $1 million, resulting in free cash flow of about $36 million for the quarter.
Next I will turn to our segment results.
Tms revenues for the quarter of $521 million decreased $14 million or 2.7%.
Compared to the prior year quarter.
The decrease was due to a $39 million in COVID-19 impacts the majority of which was non labor.
This decrease was partially offset by $25 million increase in on contract growth and new business programs.
Dms adjusted operating income and margins increased year over year due to increased volume on higher margin programs and revenue mix.
And partially offset by lower revenue volume and higher as DNA expenses.
In our NSS segment revenues for the quarter of approximately a 145 million.
Decreased about $17 million compared to the prior year quarter.
The decrease was attributable to a $15 million impact from COVID-19.
The majority of which was non labor.
Announce sentra acquisition, which is expected to close in the fourth quarter that leverage will be almost three six times with ample liquidity provided by cash on hand free cash don't get free cashflow generation and our credit revolver.
We plan to fund the transaction and associated fees with cash on hand, and borrowings from the delay through all the turmoil.
[noise] moving onto Twenty-twenty financial guidance.
Based on our financial results for the first nine months of the year and are updated outlook for the remainder of the year.
We are revising our fiscal year 2020 guidance as follows.
For fiscal year 2020, we are maintaining and now a ring revenue to the range of 2.625 billion to 2.675 billion.
Despite continued impacts from COVID-19.
Based on the revised guidance and year to date contract awards near.
Nearly 100 per cent of our revised guidance.
Is that the mid at the midpoint as in backlog.
We are reiterating are adjusted EBITDA guidance, and a range of $172 million to $178 million.
And we are increasing our free cashflow guidance from 100 million to 110 million or greater.
Please know the 2020 financial guidance excludes the announce acquisition of Sentra.
Excluding COVID-19 impacts.
We would be generating revenue within our original guidance range and adjusted EBITDA would have exceeded the high end of the original range.
Are adjusted EBITDA guidance is based on the recognition that we have experienced a negligible impact to adjusted EBITDA. COVID-19, we are seeing rose and higher margin areas of our business just as we had expected.
In accordance with our strategy. In addition, we have experienced a trade off to Covid.
Which we've seen a reduction in lower margin non labor revenue and an increase in shorter duration labor focus covid response, rather them.
We expect margins to decline in the fourth quarter to two seasonality, we've seen historically and due to a moderate increase in non labor revenue.
Full year adjusted EBITDA is expected to deliver a 60 basis point margin increase for the full year compared to last year.
40 basis points greater than our original guidance.
With regards to cash generation, we are increasing free cash flow guidance to at least 110 million, reflecting strong margin performance and working capital management.
Other key assumptions for our 2020 guidance are available in our third quarter earnings presentation on the investors section of our website with that operator, let's open the call for questions.
Thank you.
As a reminder, ladies and gentlemen to ask a question like fresh start one of your telephone.
Four enjoy your question we press the pound key.
We stand by working politics Dooney roster.
And our first question comes from the line of Archie Bunker with.
Deutsche Bank Carolina's nope.
Hi, Good morning. This is an exercise frenchies and thanks for taking my question.
Maybe if we could start can you. Please discuss that I'd be I cannot be tedious your lineup Peter maybe he can comment on <unk>.
That's quite a opportunity is are the status of any of them.
Well with respect to G.
Specifically.
We have seen a.
A few task orders come out we actually one one of the first awarded task orders with a partner on G tax but.
But we do have a very strong line of sight from what the government is laid out in terms of volume over the next 12 months, which adds up to about $1 billion an.
Q task order volume.
That were expecting.
And the.
The government is laid out kind of what what.
What the specific scope is for these task orders and we are actively kind of working the capture on these and expect to see some good volume in the next six months.
With respect tomorrow.
Yeah, Oh, sorry, please continue yeah.
Yeah just in general.
Q volume has been very solid kind of what we would expect typically in a fiscal year.
T ask cap Aftercast have all been very good idea iqs for US this year was that a good number of wins.
Including some recent wins.
At.
Show kind of.
Keeping up with our plan in terms of the expectation of volume.
Even though we've got this covid going on.
Okay. Thank you and then maybe one more having announcer French acquisition, you expect anymore, how many opportunities and Danny Kaye you can provide on the pipeline are alright strategic areas, It's OK <unk> physician.
Inc.
Yeah sure I think we're very excited about the sentra acquisition.
We're hoping to close that shortly.
With our refinancing we think it put us in a great position to execute our strategy and to make this acquisition happen.
I think as we look forward.
We see a market.
As.
Many properties that are either out or coming out in the near future and with respect to our.
Our strategic focus we're going to continue to look at opportunities that could.
Continue to drive solid organic growth by expanding addressable market significantly international security space intelligence space similar to what we've done with Sentra, obviously, we're going to as we have talked to a charlie's talked as well, we're going to be very cognizant of.
Where are leverages and kind of stay within a corridor, we think works for.
And we've proven our ability to pay down debt quickly over time, and and really focus on opportunities that have high free cash flow characteristics similar to ours, but I think there's continued opportunity for us to look at acquisitions and we're going to stay active in the market.
Great. Thank you.
Thank you.
Next question comes with a lot of Chris more CJR security, so long as milk.
Hey, good morning, guys.
Yeah, I was hoping maybe you could talk a little bit more about the the updated guidance looks like revenue range is tightening little bit EBITDA is unchanged cashflows, maybe just a little bit more about that that puts and takes there.
Sure.
First of all I would like to comment that as you look at our queue Ford.
Overall guidance in the queue for perspective, we're taking a conservative approach on the forecast first of all.
We do expect a change in revenue mix in the fourth quarter.
There'll be higher Ldc's, which will generally have lower margins and that'll be coming predominantly from our gms business.
We did experienced a surge in on contract gross in the third quarter.
Which also help to drive.
On budget. This is not a year, where either party is going to want to.
Make the budget the central issue when we're still dealing with the Corona virus and we do see this.
This.
Cronto virus problem extending.
Into 2021 calendar year. So our expectation is from a budget standpoint, we're going to see rather similar spending level in 2021.
And we think that bodes well for PE is we're focused on that kind of mission.
Mission support enduring mission elements of the government that have been very strong in prior CR years and in even where we have seen government shutdowns in the past.
We've.
Typically remain mostly at work during these difficult times, because the things that we do just have to get done.
And we think sentra as well fits that profile in terms of what they do.
So that just adds to kind of that enduring base.
Mission support work and we're you know we were not looking at 2021 as a big difference in terms of spending compared to 2020.
And if we did if we do see some.
Support slow back to that.
And some that.
Or other areas.
You you have exposure there do you think that would be beneficial to some of your legacy programs.
Well, we certainly believe that the state department.
It has been a a constant kind of.
Steady.
Customer for PE over many years over decades really and.
That different administrations, obviously foreign policy and engagement externally.
Is is a less priority or a greater priority.
Were I think over the last few years, we've seen it kind of go to.
The less aggressive externally in terms of engagement and we think that is that that ebbs and flows. This could we could be looking at a period of time, where we'd see an increase in.
Focus with the state department engagement externally, which could be positive for PE.
Hi.
And then just following up on.
On your question.
Those are some color on you mentioned some properties that youre looking at what technologies or capabilities are those and maybe what is the timing you are looking at some of those opportunities.
Sure sure I think would.
The centra acquisition it expands our footprint within the intelligence community. It expands what PE guys from a capability standpoint and areas of business intelligence analytics in particular.
Secure communication systems.
Implementation integration maintenance and we see it.
The kind of the domain of intelligence analytics as.
A significant focus areas strategically for us.
We also see medical services as a very strong growth area, depending that as we've seen going through the krona virus that the medical some services medical support it's become a bigger priority and we've seen this under both administrations that.
Just gone through the Obama administration Trump administration. So we do think those are two areas strategically that.
We feel fit very well they will have a strong spending profile in support behind it and that as we look at.
What we'd like to continue to add to sure up our ability to grow in those areas, we'd be looking at companies that have those characteristics those capabilities the customer.
Cash performance in those areas.
Okay. Thank you for the time.
Thanks, Josh Thank you.
Thank you.
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And I'm not showing any further questions on the coal mine at this time I would now like some the call tomorrow.
Cohorts.
Okay.
Well. Thank you very much for your continued interest in PA and thanks for joining US. This morning. If you have any questions. Please don't hesitate to give me a call. Thank you.
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