Q1 2021 PAE Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to <unk> first quarter 2021 earnings conference call. My name is Victor and I'll be your conference operator today.
Call is being recorded.
Like to turn the presentation over now to your host for today's call, Mike Schindler, Vice President of Investor Relations for P. Please go ahead, Mr isn't there.
Good morning, and thank you for participating in <unk> first quarter 2021 earnings announcement, we hope you've had an opportunity to read the press release, we issued earlier. This morning. We have also provided presentation slides on the Investor Relations section of our website.
Joining me today to discuss our business and financial results as Charlie Piper.
As interim President and Chief Executive Officer.
Following our prepared remarks, we will 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 <unk> 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 and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures reckon.
Reconciliations of these non-GAAP financial measures to the comparable GAAP measures are contained in the press release and Investor presentation issued earlier today and now I will turn the call over to Charlie Piper.
Thank you all for joining us this morning for our first quarter earnings Conference call.
I'd like to start by thanking our customers employees dedicated personnel across the globe, who drive our success.
Especially want to recognize our employees. Thank you for your dedication in serving our customers and your resolve in driving our strong performance.
We delivered a very strong quarter based on your accomplishments and commitment Susan the missions we support.
For today's call I'll start with an overview of the key fundamentals of the business and the highlights for the first quarter. In addition, I'll address our preliminary thoughts.
On the bite administration initial proposal for the fiscal year 2022 budget and other macro trends.
Beginning with the first quarter results, we performed well delivering strong organic revenue growth profitability and cash flow.
We have experienced a modest increase in actual and planned bid submissions when rates are in line with our expectations and we're seeing a measured return to normalcy from the COVID-19 pandemic.
Well, we're not out of the woods, we are seeing fewer disruptions from travel logistics and programs, which experienced labor hour disruptions are moving in the right direction all of which is consistent with the assumptions made in establishing our guidance.
Furthermore.
Our internal forecast anticipated light award announcements for the first quarter. Our results were in line with those expectations.
From a financial perspective, all key measures exceeded expectation.
Moving on to a more detailed financial results. The core business grew approximately 7% year over year and that does not include the positive impact from recent acquisitions. This increase.
This was driven by new business opportunities and a net increase in contract volume on existing programs.
In addition margins exceeded our expectations, despite a higher mix of non labor.
Demonstrating the continued progress, we're making expanding into higher margin business areas.
Moreover, we had a solid first quarter in terms of cash flow generation driven by strong working capital management, including the approximate $15 million in accounts receivable that we originally anticipated collecting in December but were delayed into early January.
You will notice in the earnings release issued this morning and in our remarks, we're making fewer references to impacts from COVID-19.
Current impact from COVID-19 is consistent with our guidance. Thus our analysis has been simplified to focus on business trends, excluding specific code that COVID-19 impacts.
Next I'll spend a few minutes discussing notable awards this quarter and our expectations for the cadence of future Award activity.
Going into the year, we knew first half award activity would be light, we expect to see a moderate pickup in awards in the second quarter and a larger increase in the back half of the year. This is consistent with our original expectations and our guidance was based on these trends.
Our first quarter awards showcased several promising trends of winning new business and higher margin areas of our business.
For example, we wanted an attractive task order on the <unk>, two <unk> IQ, providing satellite communication support.
Furthermore, central App met has contributed <unk> <unk>.
Several high quality awards, providing survival as Asian resistant escape training, along with curriculum development for the joint personnel.
Every agency as well as intelligence support to the bureau of alcohol tobacco and firearms.
Our Gms segment added several embassy related awards and a number of contract extensions that further mitigate recompete risk this year.
As you'll recall from our fourth quarter call.
We began emphasizing five core focus areas of our business.
Infrastructure and engineering.
Mission readiness.
Business solutions test and training solutions and intelligence and technology services.
Our pipeline continues to shift towards these latter three areas, which is a key driver of our margin expansion strategy and we're looking forward to several notable awards for the second half of the year.
Yeah.
The day tax from drilling personnel recovery Agency contract awards highlight it Earl.
Earlier illustrate our success expanding our portfolio of testing training and Intel and technology services programs for.
Tomorrow, we expect that our existing portfolio of strategic contract vehicles, they accelerate growth moving forward.
We expect task order volume on our idea iqs.
To accelerate in the second half of the year through contract vehicles, such as key tax to GSS Fai three mega five.
With regards to the infrastructure and engineering focus area, we continue to build a sizable pipeline of opportunities.
That provides predictable low single digit growth.
And the scale to pursue higher margin opportunities in growth areas, we are targeting for expansion.
Our mission readiness allows us to deliver critical services utilizing quick reaction times, such as the COVID-19 relief several opportunities under proposal.
Prime examples.
Subsequent to the end of the quarter.
We want an attractive intelligent analytics contract award.
Further elaborate on.
A key rationale for the central and <unk> acquisition was to leverage their significant IV Iq portfolio.
Specialized skill set.
Centered around intelligence and National Security markets does this end we were awarded a new business task order value that $65 million to provide calendar intelligence and human intelligence support services to a national security customer.
We expect the intelligence analytics market to be an increasing area of focus for the government as the United States and Allied Nations continue to face heightened geopolitical risks and threats as.
As we mentioned with the recent new business win.
These acquisitions provide a new set of differentiated capabilities with high barriers to entry and market areas with expected growing and sustainable market demand.
Next regarding the $313 billion CVP Award as we previously discussed we have filed a protest with the government Accountability office and that decision is expected is expected to be made by mid June.
Now I'll provide a summary of the bid pipeline at the end of the quarter. We had about $5 7 billion in awards under evaluation of which $3 2 billion as new business from approximately $2 $5 billion of Recompete Awards. We have also an incremental $1 7 billion in proposal writing process.
You already have which is new business and Gms, we expect to benefit from our diversified set of customers capabilities and our global reach to address an attractive demand environment.
Geographically, we are particularly focused on the pay com region, which we believe will be a region of intense.
Focus for the foreseeable future.
From a customer perspective, we're excited about several pursuits across the department of state USA I D U S Navy and the defense Logistics agency.
Within Gms, we're awaiting approximately $4 5 billion in awards, which includes the protest at $1 3 billion CVP contract.
Approximately $2 5 billion.
Our Recompete awards is about $2 billion of new business opportunities.
Before I move on to the NSS pipeline I'll spend a few minutes on the Baidu administration's decision to withdraw U S troops from Afghanistan.
Post potential impact for P. A.
While the situation remains fluid.
I'll start with the basics are revenue in Afghanistan is comprised of the department of State and Defense Department of defense programs.
The department of state exposure is roughly 4% of revenue and the Doj is approximately 7% of revenue our DSD related exposure is driven by the Afghan lead contractor support supported.
National maintenance strategy program.
Which provides vehicle maintenance and logistics support for the Afghan military forces we've.
We've had discussions with our customers about the future of this program, but at this time, we do not have enough information to provide a specific outcome with.
With regard for Department of State, where we currently do not anticipate any negative impacts related to our operations in country.
In developing our guidance for the year, we took a prudent and conservative approach to account for these potential macro environment risks.
Based on our risk adjusted forecast and the new business in our plan, we remain confident in our financial guidance for the year net.
As we move forward beyond 2021, we believe our pipeline is well positioned to capitalize on the Dod strategic shift towards the Asia Pacific Region. In addition to new business pursuits focused on a diverse set of federal civilian customers with expected growing spending profile.
Yes.
Turning back to the pipeline in our NSS segment, we see significant opportunities with department of state through our GSS IV IQ contract Award the Justice Department. They are sent our seat on the Mega five contract and a variety of opportunities spread across the national security community via our seats on <unk> two <unk> three.
And various pursuits within the Intel community.
NSS is awaiting what about $1 2 billion in awards, the majority of which are new business relative to task orders.
We will bid under the GSS contract are not reflected in the bids under evaluation or in the proposal writing process.
Next I'll provide my perspectives on the by the administration of topline budget proposal released in early April.
Pleased with what this initial budget request could mean for PAA proposed defense spending of 753 billion was in line with our expectations keep in mind, however that only 30% of our planned 2021 revenue is tied to defense spending.
It's spread fairly evenly among army Navy and Air Force. In addition, we were pleased to see healthy increases among several federal civilian customers. The budget proposal contained increases for the state Department Justice Department, and health and human services, approximately 12% five per cent and 23%.
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Our expectation is that the spending proposed by the by demonstration will be directed to funding priorities, such as global health and medical support.
Science and climate focus immigration.
International development.
And addressing refugee in humanitarian issues.
In addition, the Doj may likely prioritize the geographic strategic shift towards the Asia Pacific region, and a focus on modernization efforts.
These are all areas of longstanding PAA expertise and have potential to represent new revenue streams in the future.
With regard to the proposed 12% increase for the state Department and USA I D.
A strong indication of this administration's effort to put diplomacy front.
In center and their approach to foreign policy.
Moreover, the proposed budget increases for the Justice Department, and health and human services of 5% and 23% respectively are notable.
Even our core competencies and litigation support business process solutions, and our focus on expanding into health services. The budget per foot proposal is very promising.
Before I pass things back to Mark who will address our financial results.
Take a moment to provide a brief update on the CEO recruitment search process.
Our board of directors is committed to performing at search with the utmost diligence. The board has engaged an executive search firm and.
I will take the time needed to find the best individual for the role.
Right now we continue to push forward on our strategic plan and the operating rhythm of the business has not losses instead.
With that I'll hand, the call over to Mark for an overview of our first quarter financial results.
Thanks, Charlie good morning, and thanks to everyone for joining us on the call.
I'll provide an overview of our first quarter 2021 results followed by a discussion of 2021 guidance.
I'll start with key takeaways as Charlie discussed.
We delivered a strong quarter that exceeded our expectations in terms of revenue adjusted EBITDA margins and operating cash flow.
We delivered organic revenue growth of 7% and despite a higher mix of non labor revenue compared to our plan, we generated adjusted EBITDA margins exceeded expectations.
Operating cash flow continues to benefit from strong working capital management across receivables accounts payable and other accrued expenses as well as the $15 million in collections that shifted into the first quarter from the prior quarter.
Moving to the detailed results I'll start first with revenue, we delivered $749 million of first quarter revenue, representing about 7% organic growth over the prior period.
For central and <unk> acquisitions delivered approximately $89 million in revenue, which was in line with our plan and <unk> core business outperformed relative to our internal plan.
Revenue benefited from new business awards increases in contract volume on existing programs and higher non labor revenue.
First quarter adjusted EBITDA margin was six 3% modestly higher than expectations. Despite a higher mix of non labor revenue in the quarter.
The recent acquisitions added 20 basis points of margin expansion to the consolidated results, which was in line with our expectations.
First quarter adjusted net income grew to $16 million, an approximate 7% increase over the prior year.
Cash provided by operating activities was about $55 million for the quarter.
As I discussed this was higher than expectations and driven by strong working capital management as well as the shift of receivables from December to early January.
Moving next to our segment results Gms first quarter revenue grew 14% over the prior period due to new business, including COVID-19 relief opportunities, partially offset by reductions in contract volume on certain programs.
Gms first quarter adjusted operating income was about $28 million for the quarter at a margin of five 3%.
Margins declined relative to last year, primarily due to higher non labor revenue this quarter, but performed in line with expectations.
Turning to the NSS segment, we generated $227 million of revenue of which about $89 million was attributable to the recent acquisitions.
As we've previously discussed.
NSS previously lost three contracts that shifted to small business for <unk>.
For these programs ended in the first quarter of 2020 excluding.
The revenue from this third contract in the prior year comparison, and the negative COVID-19 impact on our immigration related work.
<unk> delivered low single digit revenue growth over the prior year period.
NSS first quarter adjusted operating income improved to $19 million driven by the increase in revenue.
NSS margins declined relative to last year due to the timing of net profit adjustments in the prior year period, but exceeded expectations for the quarter and were higher than full year fiscal year 2020.
I'll take a moment to discuss the recent 8-K filing described the impact of accounting for warrants and the requirement to restate our financial results here.
Historically, the consensus among the leading public accounting and legal firms had permitted equity classification for warrants issued by special purpose acquisition companies are specs.
Just on the fact that warrant agreements included certain standard provisions however.
However in April the FCC staff issued a statement expressing a view that most warrants issued in connection with our spec transaction should be accounted for as liabilities rather than equity instruments for the company.
After consultation with our audit firm <unk> determined that the consolidated financial statements and footnote disclosures included in our 2020 annual report on form 10-K.
Filed with the SEC on March 16, 2021 in the condensed consolidated financial statements included in our quarterly reports for the first second and third quarters of 2020 must be restated.
There is no cash flow impact associated with the financial reporting changes nor will there be going forward.
However, the warrant accounting has the potential to create quarterly GAAP net income volatility due to the mark to market requirements.
Moving next to the integration efforts on central and Medicine, as we discussed on our fourth quarter earnings call. The customer facing integration efforts were completed this quarter, our business development and operations teams are fully functioning as one integrated team, which is a tremendous accomplishment.
Thanks to the Sentra medicine NSS teams for your dedication and commitment to complete this aspect of the integration so efficiently.
We're now focused on completing the back office integration, including moving to a single instance of our cost point accounting system and our workday human resources system. This is on track to be largely completed by the end of the quarter.
Given the progress we've made to date the cost synergy estimates remain accurate about $4 million in expected FY 'twenty, one cost savings and realizing $7 million in full run rate cost synergies as we exit the year and plan our budget for fiscal year 2022.
Because of the progress we've made integrating the customer facing activities. We've begun jointly pursuing new programs that were not in our respect to bid pipelines prior to these acquisitions constant.
Consequently, it will not be feasible to separate out the results of Cintron medicine by the third quarter of this year. Thus, we expect to identify the revenue contribution for the acquisitions next quarter just as we did this current quarter, but will discontinue doing so effective with our third quarter financials.
Moving onto 2021 financial guidance.
Based on our first quarter results and our outlook for the remainder of the year. We are reiterating the full year 2021 guidance. We provided in March as Charlie discussed earlier, our guidance incorporated a risk adjusted approach to account for uncertainties, such as potential Afghanistan withdraw financial implications.
Our financial guidance is as follows.
We expect revenue in the range of 3.05% to $3, one 5 billion with a midpoint of $3 1 billion.
We expect adjusted EBITDA in the range of $205 million to $215 million, representing a 20 basis improvement at the midpoint over 2020.
And we expect at least $120 million in cash flow from operations.
For the remainder of the year, we continue to anticipate revenue and adjusted EBITDA to be moderately backend weighted driven by the timing of new business Awards.
Other key assumptions for our 2021 guidance are available in our earnings presentation on the investors section of our website.
With that operator, let's open the call for questions.
To ask a question then, especially in you will need to press star one on your telephone and toy drawing a question press the pound key.
Once again thats for one for questions. Please from Violet compile the Q&A roster.
Our first question comes from Ryan of Chris Moore from CJS.
Securities you may begin.
Hey, good morning, Thanks for taking a few questions.
Maybe we could start on the Afghanistan, So I've seen where other.
Had been directed by there.
U S government customer.
Discontinue.
Their contracts.
Is that what you're hearing at this point in time is it limited to the Doj.
Good morning, Chris.
The way I think the way to look at this is that we.
We really had one project.
Program called National maintenance Security program, which really wasn't tied to deployment.
Deployment. It was the scope of that project was to help training.
The Afghan forces on maintenance of equipment.
With the decision that the buyer administrations made to demobilize out of Afghanistan or was it a decision to include net program as part of the day mobilization.
We're working through the details from the standpoint of timing and cost.
But that day mobilization effort is underway.
I wanted to note that our exposure is really limited to that one program Stacey.
The state Department programs do not appear to be impacted and.
Consider the impact of the.
NMS decision.
Will represent less than 3%.
Revenue exposure, and then less than 2% of adjusted EBITDA impact in 2021.
Our guidance as we pull that together contemplated various macro.
Risk elements and factors to consider such as Afghanistan, and therefore, we're confident in reiterating our guidance.
Gotcha very helpful.
Last one for me is just in terms of the.
The book to Bill assumptions that Youre, making in order to hit the midpoint of your revenue this year.
Yes, when you think of when.
We put the plan together, we have always said that the awards would be back end loaded.
We don't see any change in that just now I mean, we have a fair amount already in evaluation.
Multibillion multimillion dollar opportunities.
It will be backend loaded we still see a.
Path to submit the numbers that we had targeted at the beginning of the year.
Very excited.
The addition of Medicine center that really has bolstered the opportunities that we see and you can certainly reference the comment that I made regarding the recent award that.
Was made with with the.
Metals acquisition that $65 million award. So we're excited that we do have a clear path.
For the backend of.
New business as well as the submissions in the second half for the year.
Sounds good I appreciate it I'll jump back in line.
Once again Thats star one for questions. Our next question will come from the line of Samir <unk> from Deutsche.
Which bank you may begin.
Hi, Thanks for taking my question, what I wanted to drill a little bit deeper on was on the on the integration side of central and medicine.
The back end part is completed how do.
Do you see the the the revenue synergies evolving going forward in terms of what you see so far.
Are they performing in line with your expectations or how does it trend going forward for.
For the next one or two years.
So.
Going from here.
When you think about.
The integration of the two acquisitions as Mark has already articulated.
Great progress on the synergies standpoint, but really where the value creation is going to be coming from is really on what we are calling phase one which is the utilization and capitalizing on the IV Iq vehicles.
That really were of interest to us when you looked at those two companies for them from an acquisition perspective.
How do you see the one award that we highlighted in the communication that's a reflection of some of the track. The attraction. We're getting that was an opportunity that was not included in other companies funnel until the transaction took place and you can see very quickly we were able to re vector put together a compelling proposal and.
Okay.
Yes from here.
Well, we have a fair amount we have a handful of multimillion dollar.
Opportunities already in evaluation, there will be more going interest submissions on this in the second quarter like we always said we felt the second half of the year was really weird, we're gonna see the traction on new business Awards.
And that's spelled playing out as we had discussed before we currently do not see any change as far as that's concerned and certainly the medicine central acquisitions are contributing to that as well.
Got it thank you.
Yeah. Once again that started one for questions from one.
For questions.
And I'm currently not showing any for the questions in the queue I'd.
I'd like to try to call back over to the speakers for any closing remarks.
Well. Thank you very much for joining us on this first quarter call and is always please reach out to me with any questions. You have happy to arrange time to speak with management. Thank you for your support have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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