Q2 2021 PAE Inc Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please can you just standby. Thank you for your patience.
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Good morning, ladies and gentlemen.
And welcome to P. A E second quarter 2021 earnings conference call.
My name is Sarah and I'll be your conference operator today.
This call is being recorded I would now like to turn the presentation over to your host for today's call Mark and Larry Vice President of Investor Relations for P. H E P.
Please go ahead Mrs Adler.
Good morning, and thank you for participating and <unk> second quarter 2021 earnings announcement and we.
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.
And 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 and 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.
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.
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.
Yeah.
Okay.
Thank you all for joining us this morning for our second quarter earnings Conference call.
I am pleased with our results for the second quarter.
We generated significant margin expansion and saw a strong improvement and our net bookings.
Positive momentum positive momentum has continued and the first month of the third quarter and I'm encouraged for the second half of the year.
For today's call I'll start with an overview of the key fundamentals of the business and the highlights of the second quarter.
In addition, I'll address our perspectives on the macro trends and our industry and <unk> competitive positioning.
Beginning with the second quarter results, we performed well delivering 2% organic revenue growth and strong margin expansion compared to the first quarter of 2021.
Revenue was slightly below our internal expectations due to timing on several <unk> IV IQ vehicles. However, these task orders have now been awarded.
And we have line of sight to the 2 delivering the revenue growth and the second half of the year.
We continue.
To plan to submit at least $10 billion and bids this year and more than $7 billion is new business.
With regards to COVID-19, we've continued to see and measured return to normal operating levels with increased staffing on our training and immigration related programs and increases in travel and fewer disruptions to logistics efforts.
We are monitoring the impacts of the Delta variant, but to date, we have not seen.
New disruptions to our business.
Moving on to our more detailed financial results.
The core business grew approximately 2% year over year, and the central and Medis business grew approximately 25% over last year driven by several sizable contract wins by both companies and the second half of 2020.
We were also pleased to see legacy NSS returned to growth, we achieved 5% organic growth driven by on contract growth on a variety of programs and COVID-19 recovery and our training and immigration related business.
Areas. Our Gms segment grew more grew about 1% year over year.
Driven primarily by new business wins.
I'm really proud of our teams for driving such strong adjusted EBITDA and margins this quarter.
As further validation of our ability to execute our margin expansion strategy on margins contracted about 40 basis points over last year. This was primarily driven by the acceleration of bid and proposal costs. This year and the COVID-19 reduction of non labor revenue and the prior year period.
You'll note on our earnings release that cash flow was negative for the quarter.
And this is a timing issue and and so isolated to a handful of programs.
During the last few days of June, which falls in our fiscal third quarter.
Collected approximately $31 million and receivables that were planned for our fiscal second quarter.
As I discussed earlier, we experienced a solid improvement and award activity.
For the quarter and and we've seen continued progress to start the third quarter. As you will note in our earnings release. The awards, we highlighted demonstrated our diverse portfolio across intelligent analytics mission readiness business solutions test and training solutions and infrastructure management.
The second quarter Awards also demonstrated our broad geographic reach including several notable awards and the Asia Pacific region.
And we'll continue to be a region that we emphasized strategically.
Next regarding the $1.3 billion and CVP Award the government Accountability office denied our protests on June 8 and we subsequently filed a protest with the court of federal claims.
We believe a decision should be rendered by late third quarter.
Now I will provide.
A summary of the bid pipeline at the end of the quarter.
We had about $7.5 billion and awards under evaluation.
Of which about $4.9 billion as new business and approximately $2.6 billion, our Recompete Awards.
We also had an incremental $1.2 billion and the proposal writing process, almost all of which is new business and.
In addition, following the end of the second quarter Gms was awarded approximately $402 million.
That's a recompete contract net Johnson space Center, and Houston, Texas.
The Johnson Space Center Award was subsequently protested by a competitor and that and the protest is currently pending at the government Accountability office and so.
And <unk> Award is upheld we will take it into backlog at that point in time.
Within Gms and including both CVP and Johnson Space Center, we're awaiting approximately $5.3 billion and awards.
More than 3 billion, our new business awards, and about $2.2 billion or recompete opportunities.
And NSS.
And we're awaiting more than $2.2 billion and awards of which $1.9 billion and this new business and close to <unk> 4 billion a recompete.
Awards on <unk>.
Pleased to report that during the second quarter, we were successful winning all our Recompete task orders submitted under the Department of Justice make a 5 litigation support services program.
A great accomplishment by our team.
As I mentioned earlier, we expect to be at least $10 billion. This year with more than 7 billion being new business opportunities, we're forecasting gms debate about 55% and NSS the 45% of this total.
I'll take a moment to step back and provide additional commentary about the general themes we are pursuing.
Across <unk>, we continue to benefit from our diversified set of customers capabilities and our global reach to address and attractive demand environment.
From a customer perspective.
Our strategic focus areas are closely aligned with defense intelligence and federal civilian and key priorities within the department of state. We had several key wins with USAA, including infrastructure management, and Bangladesh and we were awarded a seat on the Usaid's Global architecture Engineering and services <unk> IQ.
In terms of capability, we see continued prioritization from the administration and areas such as international development Foreign policy initiatives.
Gration services D O D readiness and intelligence analytics and geographically, we are well positioned given our presence on all 7 continents, which is a unique competitive advantage.
As we noted previously we are particularly focused on the pay Com region, which we believe will be a region of intense focus for the foreseeable future.
Our recent contract awards with the Defense Logistic Agency and Korea.
And for base operating support services.
At Marine Corps Air station, and Japan further solidify our strong rolling position and the pay Com region.
We're also well positioned in terms of contract vehicles.
We will continue to pursue attractive IDI cues to further enhance our portfolio and.
In addition, I believe we can execute our near term financial objectives based on the idea of Qs. We have already won positions on over the past. Several years. This is a tremendous accomplishment by our business development teams and we look forward to successful execution moving forward.
Thanks, and I'll spend a few minutes discussing Afghanistan and its impact on our business as I discussed on our prior call our revenue and Afghanistan is comprised of department of State and Department of Defense programs. As we entered 2021. The department of state exposure was roughly 4% of revenue and <unk> was approximately <unk> <unk>.
7% of revenue and driven primarily by the maintenance the national maintenance strategy or NMS program, which provided vehicle maintenance and logistics support for Afghan and forces.
Based on the buy and administration's decision to withdraw both U S troops and Dod contractors or NMS program was effectively concluded at the end of June we have revenue ceasing and the third quarter I'm extremely proud of the quick turn day mobilization effort by the team.
The day mobilization process was very efficient and successful and demonstrates our leadership and professionalism of our team on the ground and Afghanistan.
With regard to our ongoing state Department programs, we're seeing significant support from the U S government on keeping the U S Embassy and couple open.
Our expectation is that the department of state will explore a variety of scenarios to address security concerns and.
Our current understanding is that we will not see reductions to revenue or profitability.
Mark will elaborate elaborate further in his remarks, but based on the financial results to date and our outlook for the remainder of the year. We are reiterating guidance. Despite the financial impact from concluding the NMS program and Afghanistan.
With regard to the federal government.
Budget discussions we are currently monitoring the ongoing negotiations thus far.
We're pleased with the direction of discussions.
Regarding the 2000, and 2022 defense intelligence and federal civilian budgets, even if we start government fiscal year 2022 under a continuing resolution.
And our industry have grown accustomed to operating and they see our environment and we do not anticipate any changes to business operations.
Lastly, before Mark addresses our financial results I'll provide an update on the CEO recruitment search process.
As we previously communicated our expectation was that this process will take about 4 to 6 months and we see no reason to revise this estimate.
The search committee has interviewed numerous highly qualified candidates and we believe we are on track to name the CEO within the estimated timeframe.
And the meantime, we are continuing to execute against our strategic plan and building momentum for 2022.
With that I'll hand, the call over to Mark for an overview of our second quarter 2021 financial results.
Thanks, Charlie good morning, and thanks to everyone for joining us on the call.
I will provide an overview of our second quarter 2021 results followed by a discussion of 2021 guidance I'll start with key takeaways as Charlie discussed, we delivered a solid quarter and which we generated strong adjusted EBITDA and margins and experienced a strong improvement and contract award activity.
Revenue was slightly lower than our internal plan, but based on our bid submissions, we remain confident and our revenue guidance for the year on.
Operating cash flow was below our expectations due to timing considerations.
As Charlie discussed we collected $31 million of receivables that we had planned on collecting at the end of our fiscal second quarter ending June 27 that was collected over the last 3 days of June.
Consequently, based on this activity and our anticipated results for the remainder of the year, we are reiterating our operating cash flow guidance for the full year.
Moving to the detailed results I'll start first with revenue.
We delivered $747 million of second quarter revenue, representing about 2% organic growth over the prior year quarter.
The central and <unk> acquisitions delivered approximately $93 million and revenue, which represented about 25% topline growth over the prior year quarter.
Legacy Gms and NSS grew about 1% and 5% respectively over the prior year Rev.
Revenue benefited from new business awards increases and contract volume on existing programs and higher non labor revenue.
Second quarter adjusted EBITDA margin was 7.1%.
Modestly higher than our internal plan and.
And the 40 basis point contraction and margins relative to last year was primarily due to an acceleration of bid and proposal costs and the quarter and the reduction of non labor revenue and the prior year quarter.
Second quarter, adjusted net income grew to $21 million and approximately 8% increase over the prior year.
Cash used in operating activities was about $12 million per the quarter as I discussed this was driven by customer payment delays, which were collected the first 3 days of the fiscal third quarter.
In addition, cash used in investing activities was approximately $14 million for the quarter, driven primarily by approximately $10 million and capex supporting our customer program.
Recover these costs through customer charges over the life of the contract.
Moving next to our segment results Gms second quarter revenue grew 1% over the prior period due to new business wins, partially offset by reductions in revenue volume due to program timing GM.
Gms second quarter adjusted operating income was about $35 million for the quarter at a margin of 6.8%.
Margins declined relative to last year, primarily due to higher SG&A expenses, including an increase and bid and proposal cost this quarter and the reduction of non labor revenue and the prior year quarter.
Turning to the NSS segment, we generated $236 million of revenue of which about 93 million was attributable to the recent acquisitions.
NSS delivered 5% organic revenue growth this quarter, driven by and driven.
Driven by increased volume on our training and immigration programs due primarily to COVID-19 recovery.
Moreover, the former headwinds caused by the prior year small business set aside losses are no longer impact and quarter over quarter comparisons.
NSS second quarter, adjusted operating income improved to $19 million driven by the increase in revenue and program performance.
NSS margins declined relative to the same period last year due to the timing of bid and proposal cost this year and net profit adjustments from the prior year quarter.
Moving next to the integration efforts of central and medicine.
And the back office integration, including moving to a single instance of our cost point accounting system and our workday human resources system is on track to be completed during the third quarter.
As a result, we are on track to meet or exceed the cost synergy estimates, we previously communicated about $4 million and expected fiscal year 2021 cost savings and realizing $7 million and full run rate cost synergies starting in fiscal year 2022.
As we discussed last quarter due to our successful integration efforts and will not be feasible to separate out the results with centura and metis by the third quarter of this year.
Thus this will be the last quarter, we separately identify sentra and metis revenue contributions.
Moving on to 2021 financial guidance based on our first half results and our outlook for the remainder of the year. We are reiterating the full year 2021 guidance. We provided in March our financial guidance is as follows we.
We expect revenue and the range of 3.05% to 315 billion.
We expect adjusted EBITDA and the range of $205 million to $215 million, representing a 20 basis point improvement at the midpoint over 2020.
And we expect at least $120 million and cash flow from operations.
At the midpoint of revenue guidance approximately 94% of our guidance is in backlog approximately 5% is from new business Awards and about 1% is from Recompete contracts.
For the remainder of the year, we continue to anticipate revenue and adjusted EBITDA to be moderately back end weighted driven by the expected timing of new business Awards.
The cash from operations guidance factors and the $31 million of accounts receivable collections that shifted into the third quarter.
And assumed quarterly run rate of about $32 million of cash flow from operations performance.
And lastly, it takes into account the approximate $18 million cares act payroll tax deferral payment.
Other key assumptions for our 2021 guidance are available and our earnings presentation on the investors section of our website.
With that operator, let's open the call for questions.
Thank you as a reminder to ask a question you will need to press Star then 1 on your telephone to withdraw your question. Please press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Chris Moore with CJS Securities. Your line is now open.
Hey, good morning, guys. Thanks for taking a couple of questions.
Good morning, Chris.
Good morning.
If you look at first half revenue first half EBITDA.
And just kind of simplistically debt.
All of that.
<unk> and a little bit below 21 guidance so.
Can you maybe walk through the assumptions on hitting revenue and <unk>.
EBITDA guidance kind of particularly in light of day.
The Afghanistan revenue and that will taper off from Q3.
Sure. Thanks, Chris.
Yes.
As you look at excuse me the bridge between.
First half second half the key driver when you look at the top line is really about $150 million of contribution is going to be coming from on contract growth <unk>.
Including in that on Contra.
Contract gross will be task order volume on existing IQ <unk> IQ. So these are quick turn opportunities that we have seats on like in Africa. As an example that will be driving the second half versus first half performance.
We have roughly about $5 billion and evaluation from new business.
As we told you before.
And we see bid submitted to be in that $10 billion range and net 770% to 80% and it's going to be new business that you can see already.
We have a significant amount of new business already and evaluation.
At this point this year.
And then from a new business win rate perspective, we expect to be in our assumptions our industry average, we're not looking for us to see a significant uptick and our win rate percentage.
And the low <unk> to mid 30% range, which would be normal and then.
We have the non labor and material orders, which as you start to see.
Things returning to normal from a COVID-19 perspective to some extent youre going to see an uptick where are we going to see a higher percentage of on a higher percentage of non labor revenue contributing and the second half different than we've seen and the first half.
Got it very very helpful.
Just last 1 from me so tighter labor availability higher wages are front and center can you talk a bit about the impact of bolt on on PAA.
Yes.
We haven't seen.
Other than other than R. R.
Other than our.
What I'll call Intel work, where it takes time to get people through the funnel.
We haven't necessarily seen a big impact.
From the standpoint of our ability to.
Acquire talent and retain talent.
Right now the biggest area that we're focused on is really the cleared cleared workforce requirements on our Intel and our Intel space and ensuring that we've got a good solid pipeline going forward, but we truthfully I haven't seen much of a headwind coming out of.
Out of the labor market, where we werent able to hire and retain people on the various programs.
Got it alright, I will leave it there I appreciate it guys.
Thank you.
Our next question comes from the line of Brian <unk> with Raymond James Your line is now open.
Yes, hi, good morning, appreciate you taking my questions here.
And really did appreciate the commentary with Afghanistan.
And maybe put a little bit more color on that since it's been so front and center and the news.
In terms of what we're seeing with embassy security how that impacts you.
Your workforce and any specific milestones we should consider over the next few quarters.
To kind of gauge the business.
On the embassy side there. Thank you.
And good morning, Brian.
When you when you step back and look at Afghanistan, as we discussed before the NMS program as effectively concluding at the end of June.
I think the team did a great job and day mobilizing and supporting that effort and the feedback that we have received from the customers has been extremely positive with.
And with the professionalism that we've taken and the approach we've taken to ensure that we demobilized and and orderly manner and and effective manner.
We have some we have some materials that are going to be and and route. So we'll recognize that revenue and the third quarter, but it's really just a tail to the program.
When you think about the U S.
Statement, our U S position.
The state Department.
Definitely committed to stay and region and maintain some presence and region specifically through the embassy operations. We've seen this play out and prior years.
So this is not something new so we don't expect to see a significant change.
Monitoring the situation and Afghanistan, including the security concerns have been raised but we currently don't see any impacts to our revenue or profitability on.
On that program.
Great. Thank you and then if I could just 1 follow up and it sounds like the opportunities in the pay Com region.
There are certainly pretty significant per year and.
Talked about strategically.
Focusing on that area can you maybe give us a little bit of the high points to the strategy there and some of the opportunities that youre looking at as you.
To build that pay com domain.
Sure.
That's always been and area of focus of ours.
Got it with the retaining the recompete win on Guam, and it's the largest port.
<unk> port and the area.
There's going to be expansion on the island and so we're well positioned to help support that expansion.
And Marine Corps is looking to establish a foothold there. So that's positive for us so we see that as a great opportunity and that's a long term contract.
So were in the first year of our performance and then we look beyond that and it's areas like DLA and there are opportunities that are coming up to support specific region that.
That we think we're properly positioned and I think on.
Our recent win on DLA Korea, even though it's been protested.
Statement that we can be competitive and provide what we think is a more effective solution to the customer and then you look at the recent awards that we had with you with Tony.
Tony that.
<unk>.
It's going to continue to expand there is opportunities that we.
We see really that touches.
The areas I talked about which is DLA.
What I will call facility support and bus operations and.
And there are other opportunities that we're looking at that.
Give us a good presence and and pay come.
Outside of what normally would be awarded under Logcap.
Great. That's helpful. Thanks, so much.
Youre welcome.
Thank you.
Our next question comes from the line of Samir culture with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question.
You noted some exploration and proposal costs.
And I was wondering.
If you could provide more color on where the spend is going what kind of projects proposals.
These costs are being focused on it.
Yes, no problem and good morning Sameer.
And our comment about the FERC the front end loading of our bid and proposal spending was really driven by a couple of items first of all to the acceleration of opportunities and areas that would have traditionally been and are more core markets. So for example, its international development foreign diplomacy.
Great and services.
And then also low Conus infrastructure.
You couple that with what we call the white space, where revenue synergies coming out of the acquisition. So things like so calm training logistics and Intel analysis.
And are really the key drivers of why you see a.
Uptick and spending and we've discussed this before that we expect.
When we're all said and done with that $10 billion worth of bid submissions.
We expected the collection and and just didn't happen.
We are focused on making sure and taking steps to improve.
And those processes to ensure that there is not a repeat and the future I wouldn't call is systemic issue.
It's more that we had a handful of contracts that each 1 had a different different.
Set of circumstances that drove those collections to.
Fall outside of the quarter, but I would not call. It a systemic issue we've already addressed those they were collected.
The organization already is.
<unk>, what we have to do to ensure that those contracts get billed and collected and the quarter are and the month and this case and.
Or very comfortable that that has already been put in place.
Got it.
And then just the just the last 1.
On on management changes you did bring up the seizure of searches on track you still on and the 3 to 6 months that you outline what about the.
The other senior positions like the the gym as president.
Changed during the quarter as well any any color you can provide their any updates.
Sure.
I wanted to first this comment on our operating and rhythm operating rhythm and then and we'll talk about where we are and the search we haven't change operating and rhythm and we had when when John was here is the CEO and Chuck was here is Chuck Anderson was here is the president so our operating rhythm hasn't changed whatsoever.
So there's been no change and from that regard and never never will be we're not deviating from our strategy or strategies clear, we're executing that strategy.
So there's no change and operating and rhythm where change and focus.
We talked about where we are with the CEO search.
The.
Replacement of the President position is really something that's going to be contingent on when the CEO is brought on board I don't think it's appropriate right now to fill that position I'd, rather wait to ensure that the C. E O as an opportunity to put his or her thumbprint on.
On the organization and.
And.
So you're going to see.
That follow the.
The CEO replacement it doesn't mean that we haven't started we have started to pull together slates to understand what's possible both internally and externally.
And so we're working through that so we'll be well positioned to move out and start that process.
Once it's.
It's clear, where we're going with the CEO search and who winds up in that position.
Got it thank you I'll get back on the queue.
You're welcome.
Thank you as a reminder to ask a question you would need to pass Star and then 1 on your telephone.
Our next question comes from the line of Matt Sharp with Morgan Stanley. Your line is now open.
Charlie Mark morning, and thanks for taking my question here.
Good morning.
Yes.
Charlie I just wanted to touch on the intelligence community and.
And 20 years and and strategic gross areas.
And even if I strip out sentra and that it's from the corner and it looks like you're seeing some some pretty good underlying demand and gross there which is somewhat and contrast to to your peers and where we've heard either ongoing or re emerging challenges around getting a new business and warranted. So maybe you can just share.
And your perspective, our observations on that customer said at the moment and what you're seeing in terms of demand and and sort of the.
Award flow at the moment.
So.
And when do you think of.
Intel.
Pre and post acquisitions and the way I would look at it this way.
We have some near term opportunities that certainly lineup with the core business that only strength and strengthened strengthens our position with the acquisition and medicine Sentra.
And we do see the continuation of those awards there has been some delay.
Some even 1 of our Recompetes has been delayed.
So it's I'm, not saying, we haven't seen that and the market.
That is true not only.
And the Intel space, it's across the entire and entire industry.
But put that aside the.
We do see opportunity to continue to grow that business organically with what we had as a corps, but even more importantly through the acquisitions and the additional organic opportunities we have as I mentioned in our and our response to the question regarding BNP.
Think about the amount of opportunities that we have and evaluation and proposal and threw qualification and potentially will be bid.
Towards the end of this year there is a pretty there's a good solid pipeline on.
Intel work that has come about and I think we're well positioned.
To compete in some cases are competitive and reaching out to us asking if we could team with them. So I think that's a sign that people see that.
And.
With the acquisitions are much stronger competitor and someone to record with and the future.
Got it and fantastic and then maybe.
1 on revenue here any update with respect to challenges tied to COVID-19 within G. M S.
And he was there.
Associated with sort of the re emergence of the delta variance or or travel on on logistics operations.
We haven't we have not seen any impact related to that.
Each operation.
Kind of stands on its own but given given the requirements that are in place by the by the customer.
The vaccination level.
The.
[noise] on site all of those.
All of those requirements are in place and and operating and so we have not seen any significant impact as it relates to the Delta variant at this point.
Okay, and then 1 last 1 if I may.
And the Capex change corner on a corner and guide and thank you are at 5 and the last quarter 20 Mil. This quarter, you mentioned and program requirements, what exactly is that and and how should we think about capex profile going forward and sustaining line item here on 1 timer.
Yeah.
We've always said before that are are capex would be and the $5 million range and we will.
Hello, He said that any capex spending other than some infrastructure cost is really going to be programmed driven so in this case here, we're talking about and.
Investments on the Guam contract to.
A combination of new claims that needs to be put in place.
And that's a large port with a fair amount of volume and then also there are support their support equipment also that's being procured on a contract. So we're incurring that fast, but we are getting that.
Recovered back.
Through the customer with billing depreciation so.
And there's there's no issue there were recovering our costs, we recover the cost over the life of the contract.
And it's just that this is capex that specific to the contract and it's it's significant and.
And the and the from the standpoint that and.
And just want to get everyone and calibrated that we're in near 15.
Of a 10 year contract so over that time period, there wasn't a lot of investment so at some point in time the equipment had to be replaced and that's where we are and this contract today.
Got it thanks, and the clarification and I'll get back on the Dot com.
Thanks, Matt.
Thank you and there are no further questions I will now turn on the call back to Mark and then and not for closing remarks.
Well. Thank you very much. Thanks for your continued support and thanks for participating on today's call.
If there are any questions. Please reach out to me. Thank you so much.
Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Okay.
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