Parsons - Earnings Call - Q1 2020
May 6, 2020
Transcript
Speaker 0
Good morning, everyone. At this time, I would like to welcome everyone to the twenty twenty First Quarter Parsons Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question and answer session. Thank you.
Now I would like to turn the call over to our presenters, Mr. Dave Steely. You may begin your conference.
Speaker 1
Thank you. Good morning, and thank you for joining us today to discuss our first quarter twenty twenty financial results. Please note that we've provided presentation slides on the Investor Relations section of our website. On the call with me today are Chuck Harrington, Chairman and CEO George Ball, CFO and Carey Smith, President and Chief Operating Officer. Today, Chuck will discuss execution against our corporate strategy, George will provide an overview of our first quarter financial results, and then Carrie will review our operational highlights.
We then will close with a question and answer session. Management may also 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 risk factors are described in our Form 10 ks for fiscal year ended December 3139, and other SEC filings.
Please refer to our earnings press release for Parsons' complete forward looking statement disclosure. We do not undertake any obligation to update forward looking statements. Management will also make reference to non GAAP financial measures during this call. We remind you that these non GAAP financial measures are not a substitute for their comparable GAAP measures. And now, I'll turn the call over to Chuck.
Speaker 2
Thank you, Dave. Welcome to Parsons first quarter twenty twenty earnings call. First, I want to express our deepest sympathies for everyone that's been impacted by the COVID-nineteen pandemic. This outbreak has been a tragic event. That's taken the lives of many individuals and further disrupted the health of many more.
COVID-nineteen has had varying impacts to families and businesses around the world. It reminds us that the true measure of humankind is not our responses in times of normalcy, but how we rise to the challenges of adversity. And at Parsons, we've been very fortunate to have had minimal impact to both our financials and staffing as a result of COVID-nineteen. Those impacts that did arise were compensated by offsetting increases in other areas as billable hours have been down by less than 2% and COVID impacted revenues were down approximately 1%. Where impacts did occur, our customers have been in communications with us on the plans and processes to return to work in a safe manner consistent with CDC guidelines.
We recognize we're working in a fluid planning environment. We assume the environment will continue to evolve as we progress through this pandemic and we're scenario planning accordingly. As I stated earlier, we're fortunate that we've not experienced any material contract delays or cancellations nor major displacement of our employees. Our customers have been supported during this public health emergency and they enacted policies to maintain their mission critical programs. From a federal government perspective, the CARES Act legislation is an effective tool against lost productivity.
It enables agencies to reimburse contractors that have employees who cannot work on a full time basis due to worksite closures or remote work policies or personnel quarantines. And additionally, the Department of Defense identified our industry as mission critical, and that has helped as well. These efforts enacted by our customers are beneficial to our nation. First, they allow the federal government's defense industrial base of highly specialized technical and management personnel to remain employed. They've also allowed the defense industrial base employers to remain financially stable.
Perhaps most importantly, it's allowed our national security to be maintained in the ongoing competition for cyber, space and missile defense supremacy. Regarding critical infrastructure, given the large and complex nature of our projects, the overwhelming predominance of our programs have been deemed mission essential to date. These projects improve the safety, security, mobility and healthy lifestyles for residents, while contributing to each region's future economic growth. Internally, we proactively we're proactively addressing the realized and potential impacts to our programs from COVID-nineteen. In partnership with our customers, we promoted telework, ensured contractual coverage and redeployed resources.
As I stated previously, today, this has resulted in immaterial impacts to our billable hours and has not impacted ongoing integration of our most recent acquisition. We continue to identify opportunities to further align our overhead investments with our strategy, while growing our business development and bid and proposal budgets. We flexed our policies and programs to maximize benefits to our employees. The President's 2021 defense budget request released in February continues to align with our strategy. Parsons' primary core competencies in artificial intelligence and machine learning, cyber, hypersonics, space and missile defense were all prioritized and appear to have bipartisan support for funding.
Authorization and appropriations still need to occur, but we're encouraged by current congressional support and our position in these key markets and technologies. Now I'll move to our first quarter financial results. We reported record first quarter revenue, achieved profitability above our internal Q1 plan, won high end work in our federal solutions market and invested in our people, processes and technologies. In addition, we continue to maintain one of the strongest balance sheets in the industry. In terms of our first quarter financial results, we delivered total revenue growth of 7%, which includes organic growth of 11% in Federal Solutions and 2.5% in Critical Infrastructure, which were all ahead of our internal plan.
We also achieved an adjusted EBITDA margin of 6.2%, which although below Q4 twenty nineteen exceeded our internal plan as the first quarter of each year has historically been our lowest margin quarter and a book to bill ratio of one point zero times, which was driven by 1.3 times in Federal Solutions. Parsons first quarter is historically our lightest revenue and adjusted EBITDA quarter. This is generally due to lower award fees, seasonality and ramping up of new contracts, combined with the overhead expenditures we invest in to make sure that our teams are aligned both strategically and operationally for the upcoming year. The revenue impacts from COVID were approximately 1% of revenue and were offset by strong execution of our contracts and recently won new business. We reported our second consecutive quarter of double digit organic revenue growth in our Federal Solutions business, and we're maintaining our guidance issued earlier this year.
Our balanced and diversified portfolio has been and will continue to be a strength. Our revenue is now almost evenly split between our two businesses and we have financially stable government customers in both segments. Our Federal Solutions team continued to execute well by winning key pursuits and posting strong win rates. We won three single award contracts of approximately $100,000,000 each and other classified cyber contracts. Additionally, we had important contract wins in our critical infrastructure business in both mobility solutions and connected communities markets.
As we indicated in our conference call last quarter, we're increasing our investments in our people, processes and technologies in 2020. This will ensure we maintain our competitive edge in higher growth and higher margin markets that collectively drive our future growth. We're investing in critical areas that drive growth, including business development, research and development and the recruiting, retention and training of our talented employees. Additionally, we've recently added key Federal Solutions executives to support and accelerate our growth in strategic markets. We strategically maintained our strong balance sheet by being selective in our M and A targets and prudent in our strategic investments.
As a result, we've maintained low leverage in over 400,000,000 of undrawn revolver capacity. Our strong financial position combined with our deep backlog positions us well to weather COVID-nineteen uncertainties. A key aspect of Parsons culture is our commitment to core values. In recognition of our commitment to integrity and innovation, Parsons was once again recognized for its ethics and IT leadership. For the eleventh consecutive year, Ethisphere, a global leader in defending and defining and advancing the standards of ethical business practices named Parsons as one of the twenty twenty World's Most Ethical Companies.
We were also named to the CIO list of the world's 100 most innovative companies. Building on these core values, I'm truly inspired by the support our employees have provided to our communities and customers during these challenging times. Our President and Chief Operating Officer, Kerry Smith, will discuss our focus on the safety and well-being of our employees and the development and deployment of new market solutions that have resulted from COVID-nineteen. These capabilities will help in what we and many others are referring to as the new abnormal operating environment as well as in any future pandemic crises. Epitomizing our core values of safety and innovation, I am so proud of the Parsons team employees across The U.
S. That initiated an effort to print three d face masks for both our employees and healthcare professionals. These masks keep our employees safe, while enabling them to perform our customers' critical missions. I'm also grateful for our team working with a municipal client to sanitize public areas to help prevent the spread of COVID-nineteen. At Parsons, our employees have always been the foundation of our seventy five year history of excellence, and we look forward to upholding that legacy during COVID-nineteen and fulfilling our corporate purpose of delivering a better world.
Finally, I want to highlight the Corporate Social Responsibility Report we published on Earth Day, April 22. Our CSR, an integral part of our corporate culture, is closely tied to our core value of sustainability and to our corporate mission to delivering a better world. This report illustrates our commitment to successfully delivering on our customers' missions, while reducing our carbon impact, improving society through our charitable support, our inclusion and diversity initiatives and by adhering to the highest level of ethical standards. In summary, we had a solid first quarter. We reported strong organic revenue growth, achieved profitability results ahead of our internal plan, won significant large and high end technical contracts, invested in our people, processes and technologies and maintained our strong balance sheet.
I'm also very proud of our employees. It is in times of turbulence when true leaders emerge, and I'm thankful for the way the Parsons team has risen to the challenge and protected our communities while delivering on our customers' missions. With that, I'll turn the call over to our Chief Financial Officer, George Ball, to discuss our first quarter financial highlights. George?
Speaker 3
Thank you, Chuck, and good morning, everyone. Today, I'll organize my remarks into five key areas: the income statement, cash flow results, our balance sheet, contract awards and 2020 guidance. I'll also discuss certain financial metrics on an adjusted non GAAP basis, where doing so provides a meaningful comparison to prior financial results. As Chuck indicated, we had a solid first quarter and reported revenue and profitability results that exceeded our internal expectations. Total revenue for the first quarter increased 7%, with strong organic revenue growth of 7% as compared to the first quarter of twenty nineteen, driven largely by Federal Solutions, which achieved organic growth of 11%.
GAAP based indirect SG and A expenses increased $6,000,000 from the first quarter of twenty nineteen. This increase was due primarily to additional costs associated with strategic growth initiatives, the impact of acquisitions, including increased intangible asset amortization expenses, public company costs as well as various positive overhead adjustments, which occurred in the first quarter of twenty nineteen, but did not recur in this year's first quarter. These increases were offset by a reversal of approximately $8,000,000 and accrued compensation costs related to legacy equity based programs linked to changes in the company's share price. GAAP earnings per share for the quarter increased to $0.13 per share and adjusted EPS decreased to $0.33 Adjusted EBITDA of $60,000,000 represents a $12,000,000 represents a decrease of $12,000,000 from last year, and adjusted EBITDA margin decreased to 6.2%. I'll turn now to our operating segments, starting first with Federal Solutions, where first quarter revenue grew 13% year over year.
This increase was due to organic growth of 11% as well as contributions from recent acquisitions. Federal Solutions adjusted EBITDA decreased $9,000,000 from the prior year quarter and our adjusted EBITDA margin decreased from 9.6% to 6.6%. These decreases were driven primarily by an increase in volume on contracts with higher subcontractor and material costs and an increase in SG and A expenses due in large part to various favorable overhead adjustments which occurred in the 2019 but did not recur in the current year quarter. And now a few words regarding our Critical Infrastructure segment. First quarter organic revenue grew 2.5% year over year, driven by on contract growth.
Critical Infrastructure adjusted EBITDA decreased by $3,000,000 and adjusted EBITDA margin decreased from 6.5% to 5.8%. These decreases were driven primarily by lower equity and earnings from unconsolidated joint ventures in the current year quarter. Next, I'll discuss cash flow and balance sheet metrics. Our DSO at 03/31/2020 stands at sixty four days compared to sixty one days at the end of the 2019 and fifty five days as of December 3139. During the first quarter of twenty twenty, we used $119,000,000 in operating cash flow compared to a use of $60,000,000 in the prior year period.
The increase in outflows was driven primarily by payment of previously disclosed legacy long term incentive compensation plans linked to the company's share price. Operating cash flow was also impacted to a lesser degree by slower than anticipated collections in our Federal Solutions segment and in The Middle East within our Critical Infrastructure segment. Capital expenditures totaled $13,000,000 in the first quarter of twenty twenty, in line with expectations. As noted by Chuck in his opening remarks, our balance sheet remains very strong. At the end of the first quarter, gross and net debt were $314,000,000 and $195,000,000 respectively, as we ended the quarter with a net debt leverage ratio of 0.6 times.
We closed the quarter with over $400,000,000 of undrawn capacity on our revolver and are in the same position as of today. Regarding awards, we reported contract awards of $966,000,000 in the first quarter, representing a book to bill ratio of one point zero times. On a trailing twelve month basis, our book to bill ratio was also one point zero. Our backlog at the end of the first quarter totaled $7,800,000,000 representing approximately two years revenue at our current run rate. Now let's turn to our guidance.
We are reiterating all of our 2020 guidance ranges provided on March 10, as outlined in our earnings press release issued this morning. We expect to achieve these results on the strength of continued organic growth in our Federal Solutions segment, recognition of higher performance award fees across the entire portfolio and targeted cost reductions centered in our Critical Infrastructure segment. With that, I'll turn the call over to Carrie to discuss some of our first quarter operational highlights. Carrie?
Speaker 4
Thank you, George. As Chuck and George indicated, we had a solid first quarter. I'm impressed by the actions our employees have taken to stay safe, to help our communities and to deliver on our customers' missions. We've been proactively monitoring and managing the COVID-nineteen situation and holding daily corporate response management team meetings since January. We mobilized quickly to ensure the safety and health of our employees, established contractual coverage and still accomplished our customers' critical mission requirements.
Today, I will cover two areas related to COVID-nineteen. First, how we're handling operations and second, new business opportunities, both in response to the current pandemic and for preparation and response to future pandemics or bio threats. From an employee perspective, we've been protecting the health and well-being of our employees and enabling them to work productively from remote locations. Across persons, we produced and delivered over 1,003 d printed face masks to protect our employees and donate to local health care providers. In addition, we increased the frequency for sanitizing facilities, redeployed staff that were impacted by a lack of customer work and enhanced leave policies.
We deployed information technology equipment, and now nearly 90% of our staff is working remotely. And finally, we virtualized our security operations center, enhanced our cybersecurity protections and ensured continuity of operations across the portfolio. From a business process perspective, our programs have been largely classified as mission essential, and we've obtained permission for remote work. Working with our customers, we've ensured contractual coverage and closely monitored potential program impacts in line with the federal, state and local guidelines. And importantly, we continue to deliver on our customers' critical missions, including our second successful small satellite launch manifested with an advanced extremely high frequency satellite.
Many of our customers have recognized our employees' performance for going above and beyond in response to the challenges presented by COVID-nineteen, and I'm very proud of our entire team. From an opportunity perspective, we were awarded several COVID-nineteen related projects. We are particularly proud of our work to provide personal protective equipment as a service for N95 mask decontamination and our deployment of virtual transportation management centers. We are also focused on providing solutions to meet our customers' needs in a post COVID-nineteen crisis world to ensure people can return to a safe living and work environment as soon as possible. Our offerings are organized into four areas: touchless screening solutions and virus testing, biosurveillance, cyber protection and digital transformation.
Parsons' mission is to deliver a better world, and our Detectwise suite of offerings will reinvent the entire personal screening experience through system integration of best of breed emerging technologies, data analytics and artificial intelligence. Our solution will help the public feel safe to travel through airports, attend events and enter public buildings. The Detectify suite of products includes a touchless health screening kiosk, mobile virus testing laboratory and a decontamination facility. With partners, we're developing a scalable nationwide IT architecture for monitoring individuals tested for COVID-nineteen and a sensing solution to monitor and detect biohazards. Our cyber protection solutions that have been developed for intelligence and defense customers have synergistic application to a variety of critical infrastructure sectors, such as energy, transportation and health care.
This infrastructure must be even more secure in the future given the evolving and increasing cyber threats. Finally, our virtual centers, including traffic management and security and emergency operations, are increasingly deployed in our digitally transformed society and will benefit a post COVID world. As Chuck indicated, we won two single award contracts worth over $100,000,000 in the first quarter. The first was with a classified customer for physical security work and is valued at approximately 180,000,000 The second was the General Services Administration Special Programs Division contract for $109,000,000 to provide program, design and construction management services for a wide variety of federal customers. I would also note that we have six additional single award pursuits worth $100,000,000 or more that are awaiting contract award.
Other notable first quarter contract wins include a contract valued at $91,000,000 with the Air Force Research Laboratory to perform on-site testing, training, enhancements, modifications and technology deployment Classified contracts valued collectively at $60,000,000 to provide cyber, operational software development work, security assessment and protection of sophisticated systems and critical infrastructure. And numerous advanced traffic management system contracts throughout North America. Our strong organic growth is being driven by our alignment to the national defense strategy and growing enduring markets, including cyber, space, missile defense and C5ISR. These are supported by the President's 2021 budget. In addition, our demonstrated ability to win large new contracts, deliver strong win rates and perform on our programs is also driving organic growth.
And finally, as announced last quarter, we recently realigned our organization into six markets to drive business growth and execution in 2020 and beyond. This structure is driving increased collaboration across our two business segments, as evidenced by the recent introduction of our four COVID-nineteen One Parsons campaigns that I just discussed. We're fortunate to have a balanced and diversified portfolio as we pursue COVID-nineteen work and large critical infrastructure contracts within the federal government, such as the Buchel's Army Airfield Program, the Antarctica Infrastructure Modernization Program, the Department of Energy Hanford Mission Essential Services joint venture contract and the ground based strategic deterrent program. We've also been able to apply our federal solutions, cyber, video and data analytics and geospatial technology in the critical infrastructure market. This strong cross pollinization between our two business segments has enabled us to win larger contracts and increase win rates.
In summary, our team continues to execute well, and I'm proud of our many accomplishments. We achieved our revenue and profitability objectives, won large strategic contracts, kept our employees safe and employed during COVID-nineteen, developed new COVID-nineteen solutions that will help our communities and our customers and optimized our organizational structure to drive additional growth. With that, I'll turn it back over to Chuck.
Speaker 2
Thank you, Carrie. To summarize, we had a successful first quarter with record revenue and significant high end contract wins. In addition, we have a strong balance sheet that we'll continue to use to further invest in our business and to weather these COVID-nineteen uncertainties. As I indicated in my opening remarks, I'm extremely proud of the way our team members have stepped up to help our communities and customers during these challenging times and delivered on their financial targets. Now we'll open up the line for questions.
Speaker 0
All right. First question comes from Ms. Sheila Kagalu. Your line is now open.
Speaker 5
Hi. Good morning, everyone, and thank you for the time. Chuck or Carrie, maybe this one's for you. In terms of FS, just consistent double digit organic growth for the second quarter in a row, I think book to bill was 1.3. How do you view sustainable organic growth?
And maybe can just talk about the recent awards and ramp on newer programs?
Speaker 2
Yes. Thank you, Sheila. Yes, we are continuing to see strong proposal activity. Our win rates have been very, very we're blessed with very good win rates. So we continue to see strong growth in that market.
I think that's at least partially due to the fact that we're aligned with the national defense priorities of cyber and obviously space with what's going on there in missile defense combined with the technologies we're involved with are the technologies that our customers are all looking for, AI and machine learning, autonomous systems, cloud computing and IoT. So we expect that growth to continue. And in terms of the pipeline and wins, I'll let Carrie address that. Carrie?
Speaker 4
Thanks, Chuck. Yes, Sheila. I would reiterate what Chuck said. This is our second consecutive quarter of double digit federal organic growth. We obviously have a strong book to bill of 1.2x.
And I think that shows our strong competitive market advantage. So I'll highlight a couple of our recent wins. We were awarded the KuVOS program with the Maryland procurement office. It is currently under protest, but we were awarded the contract, and we are performing and executing on the contract. That's a critical win for us because we're doing physical security engineering design, documentation, software and hardware development across the MPO sites.
We also were awarded last year the Combatant Command Mission Support contract for $590,000,000 for cyber operations, our largest cyber contract ever. We saw that contract ramp up as we started the first quarter of this year. Likewise, in our pivot to the Pacific strategy, we were awarded the Kwajalev Mutualist Army Airfield contract for over two hundred million dollars and that's enabled us to ramp up growth there. Some other cyber wins that we had this quarter are Dark Patriot, which is a multiple award contract. We were successful in winning the first task order released for cyber and operational software development.
We were awarded a classified contract for Infestive Waters, which is security assessment and protection of systems and a contract that is classified called Walk and Roll, which is cybersecurity capability development. So I think we continue to see our differentiation in these key emerging and growing markets.
Speaker 5
Thank you. That's very helpful. And then on margins, you talked about Q1 being in line with your internal plan and it's always a seasonally weaker quarter. Can you it does imply some ramp in the second or the remaining three quarters. Can you talk about some of the margin drivers, whether it's indirect or mix that improves the profitability profile?
Speaker 2
Sure. Yes, it's really a combination of a couple of things. The first quarter of the year is when we do a lot of intensive planning and getting our teams in line and aligned with our strategy and also with our operating plans. So our SG and A or IG and A are generally higher in the first quarter than they are in other quarters. We've seen a lot of growth, a lot of new contracts ramping.
So and those contracts that are coming on board are all higher margins. This particular quarter, we also had a little bump in pass through revenues, which tended to push down our margins a bit from that perspective. And generally, the first quarter of every year, this is kind of a repeating occurrence just like the overhead. We don't generally have higher performance related revenues or fees. So that tends to come more in Q3, Q4.
And so it's a combination of those factors is what has driven our margin down in Q1 traditionally. As Carrie mentioned, we have quite a few programs that are ramping right now. And those programs, again, are all very strong margin. And we do expect higher award performance fees as we look into downstream quarters. In addition to that, as we mentioned, we continue to integrate our acquisitions and also to align our overhead structure with our strategic focus.
So we also made some reductions, which were planned reductions in this quarter. And those really start to kick in, in Q2 and will be fully deployed in Q3 and Q4. Carrie, is there any additional color that you'd like to add to that?
Speaker 4
Yes. Thanks, Chuck. As Chuck indicated, we have some major programs that are ramping up that have a higher labor component, in particular, two classified higher labor margin contracts, KUVOS and one other, that are with the intelligence community. We were also recently awarded the Hanford joint venture for the mission services contract as we are a minority partner that is pure profit equity for our company. And on the Combat and Command, in the first quarter, as part of the ramp up, we had additional heavy material, which we will not see that's converting to a higher labor component as we go into the next quarter.
We also expect to see an increase in our equity and earnings, the profits from our unconsolidated joint ventures as we move forward.
Speaker 5
Thank you.
Speaker 2
Thank you, Sheila.
Speaker 0
Your next question comes from Mr. Joseph DeNardi. Sir, your line is now open.
Speaker 6
Thanks. Good morning. Chuck, I appreciate you guys maintaining the guidance. I'm wondering if how you're thinking about kind of 2021 or 2022 has changed at all just at least internally because of what's happening, not necessarily the lead spending priorities, but does work that you're expecting to be awarded And so the impact is maybe less than you would expect now and it starts to show up more next year.
What are your thoughts there?
Speaker 2
Yes. I think there's we've seen things go both ways. We've seen a a couple of contracts that have moved out. Some of those contracts that moved out have moved come back into this year, in fact got accelerated. So in terms of trying to see a long term trend that would indicate negativity, no, I don't see that.
On a critical infrastructure side, again, because the contracts we do are generally bond funded long term, George and I were leading the company through the global financial crisis, we didn't see cancellations there either or with oil price up and down. And I think you probably could expect to see some delays of newer contracts in those areas, but given our pivot to more digital solutions, at this point, we're not predicting material changes to twenty twenty one or 2022. George, any color that you'd like to add to that?
Speaker 3
Yes, Chuck. I agree with everything you said. We saw a lot of the same factors in the great financial crisis. The other thing I would add is we've really seen a significant pickup in emergency response work. And from the standpoint of our critical business, I think as we move through the reopening of the economy, a lot of the things we do relative to that part of the business are technology based.
And I think we'll probably see an upturn in work associated with safe passage of people through airports and just through their communities. So frankly, that's one of the reasons why we're pretty bullish and have maintained guidance, Joe.
Speaker 2
Yes. And I would like to have Carrie expand on that a bit. We're obviously doing a lot of work with productization and we were able to pivot very, very quickly with some of the things we had underway to produce our DetectWise product, which was announced on Monday and we now have the sign or MOU we're executing for our first deployment of that. And so we're pretty excited. We really haven't even put the impacts of the four buckets of technologies that Carrie discussed into the forecast yet.
So Carrie, can you kind of talk about that from a perspective of 2021 and 2022?
Speaker 4
Certainly, Chuck. As I mentioned in the remarks, one thing we're very excited about is reinventing the personal screening process, which needs to become touchless, and it can be deployed in any factor of our lives, and it can be scaled up or down. So you might have a simple kiosk solution, for example, at a sports venue, whereas when you go to an airport, you want to feel very
Speaker 7
be
Speaker 4
get able
Speaker 0
on to an an
Speaker 4
airplane. This has immediate application pretty much globally across to the world, and we're really anxious to roll this out in the next few weeks.
Speaker 2
Can you just talk about that a
Speaker 6
little more, the kiosk works and whether there are I mean, how advanced the plan to deploy it is?
Speaker 2
Carrie, you want to go ahead
Speaker 0
and take that?
Speaker 4
Sure. So we're in discussions with various sporting venue companies as well
Speaker 8
as
Speaker 4
numerous airports across the globe. And basically, the way the kiosk will work, you go up and you answer a questionnaire that says that you're willing to answer certain information about your symptoms. You will have your temperature taking. And then in a longer term solution, we'll be adding a sensor for respiratory as well. And then if you do not pass the questions at the kiosk, for example, if you're at the more complicated airport scenario, you would be sent to our mobile testing lab where you would be tested for COVID.
And then depending on the results there, you would either be permitted to board the plane or depart you'd have to depart the airport. And this really will keep all of our lives safe as we travel.
Speaker 9
Okay.
Speaker 0
Next question comes from Cai von Rumohr. Your line is now open.
Speaker 7
Yes, thank you very much. So you touched on COVID a little bit, said it was a 1% revenue hit in the first quarter. Could you talk about how much of a profit hit it was? And what sort of impact on the negative side in terms of revenues and profits do you see for the year? And maybe what have you baked in for DetectWise and other initiatives, you've talked about?
Speaker 2
Thank you, Kai. Great questions. So from a profits perspective, as we said, it is fairly immaterial. We other parts of our portfolio overdrove part of that is we reassigned people. So it's kind of hard to get down to an exact number because the numbers came in higher than plan.
But I would tell you it's in the order of that 2% of that I quoted earlier. In terms of the COVID revenues, obviously, things like the decontamination as a service that we're providing along with Patel on decontamination of masks. That's something we put into our forecast. The work from the airport is not yet into our forecast. We will be starting our first live launch right around the June 1.
So that will be revenue producing at that point. And then the others, we're still gathering industry data and looking at and incorporating that into the numbers. So all in all, we've been again very blessed between being able to between CARES Act coverage, redeploying people to other assignments. We've had very few people that were actually on work from home status and not gainfully employed.
Speaker 7
Terrific. Thank you very much. And just turning to GBSD, you're one of the members of the Northrop team and they should be getting a contract here in the next several months. How big is your contract? I mean, they're going to get a very big R and D contract.
Do you get proportionately the same amount of that big number? And how do the revenues and profits ramp for you? Thanks.
Speaker 2
Yes. Thank you, Kai. Well, that's obviously still all being worked out with Northrop and we don't want to get in front of Northrop's announcements. They're obviously working all that with the Air Force. We're in discussions with them as well as you would expect.
But our work will tend to be more front end oriented given our historic capabilities. And so we're very hopeful and optimistic that, that contract will be signed on time, which would be around August. And Carrie, do you have anything else to add to that?
Speaker 4
No. The only thing I would add is that we're working with both Northrop Grumman and Bechtel. Bechtel is going to be a member of the team as well. And so we're all in the process of finalizing our work scope. The person's effort will tend to be on the design effort in the difficult engineering areas like blast and nuclear protection, things that we've uniquely done on other intercontinental ballistic missile programs in the past and where we're uniquely qualified.
Speaker 7
Terrific. Thank you very much.
Speaker 0
Next question comes from Gavin Parsons. Your line is now open.
Speaker 8
Hey, thanks. Good morning.
Speaker 2
Good morning, Gavin.
Speaker 8
Hey, Chuck, could I just make
Speaker 3
a quick clarification on the COVID-nineteen impact? It sounded like you said there
Speaker 8
was maybe a one percent to as much two percent impact in the quarter. You do anticipate some impact for the remainder of the year, but that will be offset by benefits on programs like mask sanitation and maybe the screening devices?
Speaker 2
Yes. And just some movement in other programs that got accelerated or additional wins that came earlier than we had anticipated. The 2% was roughly the impact on our billable hours and that again, before or prior to redeployment and then also on the roughly to the earnings on revenue is nominally 1%. So in general, were things that we were able to take in stride just like other things that come up on another year. You have cancellations or protests or this kind of all got put into that same mix, just like everything else that comes up as a normal course of business.
Obviously, it's not normal business, but the impacts are quite normal course of business.
Speaker 8
Okay. I appreciate that clarification. And then on cash flow, maybe, George, if you could just talk about some of the moving pieces of working capital, confidence in collecting on those. Obviously, there's a little bit of slippage out of 4Q twenty nineteen as well and the collection timing on that was twelve plus months. So maybe just a little bit of color on what happened with collections in the quarter and your confidence on being able to get those back this year?
Speaker 3
Sure, Gavin. As I indicated in the opening remarks, we had a significant outflow, was about $40,000,000 delta year over year associated with the legacy share based share value plan. So that was the big delta as compared to year over year. So there's about then about a $20,000,000 difference year over year in what is truly operating normal operating cash flow. In the federal arena we actually had some starts which are typically slow in getting billings approved and the like.
That was probably frustrated by our government clients pivot to working from home. We've seen a decided significant improvement in cash flow in federal as we've moved into the second quarter. April in particular was very good. We've also suffered in the first quarter some slowness in The Middle East that too has picked up in the second quarter. So at this point frankly I would say I'm probably more bullish on our ability to meet the guidance than I was three months ago in spite of COVID-nineteen.
Part of that, and I'm sure you have this with the other companies you follow, has to do with the deferral of payroll tax deposits. And in the year, we'll have a benefit of a low $30,000,000 on that. So a lot of moving parts as you say, but the outlook has actually improved considerably in Q2 and we feel pretty good about our cash flow guidance.
Speaker 8
Got it. And then just kind of considering also that 4Q twenty nineteen slippage, is it possible to sort of size the amount of collections that are outstanding above what would be normal?
Speaker 3
Relative to COVID-nineteen, it's difficult as Chuck suggested to kind of separate the strands. It probably would be some number around the 20,000,000 in shortfall as compared to year over year and also referencing our internal plans. We also fell short by about twenty million. But again, very difficult to determine what would have been with or without COVID. But if I were to put a number on it that would probably be it.
Speaker 0
All right. Next question comes from Tobey Sommer. Thanks.
Speaker 10
What internal or external from a customer perspective changes at this stage do you think may result from COVID-nineteen in this experience?
Speaker 2
Thank you, Kobi. Well, I think one, like most companies that you probably talk to, we had moved to a lot of virtual officing, but nowhere near the amount of virtual officing and work from home we're doing now. And it's been amazingly easy to do. And a lot of that brought on by just the incredible technology that's out there today in terms of conferencing technologies, video conferencing technologies are learning how to conduct those more effectively and efficiently. And so productivity hasn't gone down.
In fact, in some ways, productivity may have gone up. And so I think we'll see a more of a pivot to virtual officing on a go forward basis and leveraging the IT infrastructure that we have in place to continue to do so. And on the longer term, I think we expect to see reductions in real estate costs, facilities costs, probably a reduction in travel costs. I think we're all going to be more comfortable in conducting audio and video teleconferences. And as we're seeing now a lot more of the trade shows and conferences, there's some great technology out to conduct those.
And that also, if that sticks, and I think it's a little too early to say if that will stick or not, that also could have a resultant reduction in overhead costs associated with those. I think we also see with some of our customers really scrubbing hard the amount of work that is classified and unclassified and where that line is drawn and allowing more work to be done in an unclassified environment and potentially even in a work from home environment. And then the last 15%, 20%, 25, the really critical stuff being done in skiffs, which then puts reduced load on skiffs and greater flexibility in how we conduct the work. So I think you're seeing we're seeing a lot of flexibility across the platform and a lot of these changes are, if not permanent, going to be semi permanent for the foreseeable future. Carrie, you and the team have done a tremendous amount of work looking at facilities and IT and working with our customers this regard.
Perhaps you can add a little additional color to Toby's question as well.
Speaker 4
Yes. Would say both internally and externally, there's going to be a lot more focus on teleworking. We've seen our customers starting to make a move to that. Classified customer is looking at how much can be done remotely versus has to be purely on-site. There will also be additional focus on cybersecurity.
As we saw during the crisis, the amount of attacks increased across the board. And it's not just going to affect the defense and intelligence sector who have always been focused on it, but it's going to have increasing pressure on other sectors, including energy and transportation to make sure that they're on top of it.
Speaker 10
Maybe, could I get your perspective on how this crisis and resulting recession impact two other things, the company's ability to source, hire and onboard talent and the appetite that you have as well as ability to consummate additional acquisitions?
Speaker 2
Yes. So we're very proud of our people team and what they've done. We went back mid March to completely virtual onboarding and kitting out of our employees' IT asset needs, how we conduct interviews and that has done incredibly well. March was in many ways a stellar month for us in terms of hiring. And a lot of credit goes to our operations teams and our people team in that regard.
As it relates to acquisitions, I think that we still have an appetite. There's still some great companies out there that we're in discussions with. During this period, I think you'll see a bit of a pause as we probably have already seen in industries. One, can't really do proper due diligence when we can't do get into the offices and meet with people one on one. And I think that is an essential thing that has to take place, at least from our perspective.
And we need market multiples to settle out a little bit. I think both us and sellers want to make sure that they know that there's some stability around market multiples. I do imagine that there will be companies who aren't as in the same place we are from a balance sheet perspective that may accelerate their thoughts around selling or divesting parts of their business. And I think that will probably result in increased opportunity. So and then also I will say that in some markets, what we've seen where some of our competitors have struggled, hiring has gotten a heck of a lot easier.
And that's not just in The U. S, that's internationally as well. So in the really highly skilled, highly technical markets, I would think from an employee perspective, you'll see a flight to quality, flight to the companies that you know are going to be around and can make payments and aren't asking for pay cuts and things like that. And but there's still going to be a lot of demand for those employees as well. Carrie, anything that you'd like to add to that?
Speaker 4
Just two additional items. First is our retention is the best that it's ever been. So I think that's terrific as well as recruiting. Like Chuck said, in March, it was our highest month. And we've moved to a virtual recruiting, and we found that to be quite effective.
Speaker 10
Thank you very much.
Speaker 0
Your next question comes from Mr. Ron Epstein. Your line is now open, Ron.
Speaker 2
Ron, are you perhaps on mute?
Speaker 9
Oops, yes, I wasn't on mute. Sorry about that. Yes, thanks. So good morning, guys. There was a of discussion around COVID-nineteen and the opportunities that might bring along.
But as we model the company and we think about what that could potentially be as we walk out over the next several years, how should we think about it? I mean, how big an opportunity is it? And who's competing with you in that work?
Speaker 2
Well, obviously, it's a rapidly developing market and it's really kind of hard to tell who the competitors are going to be in the various lines that we're doing. What we've seen, at least in these early stages, it's the firms that can be incredibly agile and move quickly and across market lines and industry lines with the talent that's needed have been those that have been very successful. And fortunately, we're one of those companies. Our teams have been working seven days a week, getting RFPs on Friday nights and having interviews on Saturdays and awards on Sundays. I mean, it's been incredibly inspiring and very motivating.
As we model out, I think it's probably a little premature to look at how we model that in. Obviously, these are just kicking off and I could make all kinds of optimistic or down the middle of the fairway or other projections, I personally feel more comfortable to have a little more data.
Speaker 9
All right. And then maybe just a follow on, and this is kind of to take us back to the beginning of the call. Just following up on Sheila's line of questions. You mentioned in the remarks part of the strategy is looking for high growth, high margin areas. And we're seeing the growth come through, but I'm still scratching my head on the margins.
And the thing I worry about, and maybe you can make me feel this, comfortable that you guys play in an intensely competitive market in that there's concessions being made on price that you might not be able to make up in terms of profitability over time. Why is that wrong?
Speaker 2
Well, I can tell you, we're not making concessions on price. We're not seeing that much comp price competition in the areas we're operating. I'm not saying that there's excessive margins, but the margins we're bidding are greater than our target margins that we laid out there. So maybe in parts of the market you're seeing intense competition. Areas we're working Generally, it's all based on the amount of technology we can bid and that technology is lowering the cost of the total solution to the customer.
So the customer's cost may be going down, but the profit margins that we're seeing are remaining sound. And again, Q1 is always low because of lower performance fees and revenues as well as higher overhead costs that we incur. Carrie, anything that you'd like to comment on the contracts we have going forward?
Speaker 4
I would agree with what you said. We had a shift also if you look at federal versus critical infrastructure. Our allocation is shifting because of the bigger mix that federal has as a result of that company. We had the new start contracts, combatant commander, mission support as well as Kwajalein that had higher than normal pass through costs. On CCMS, in particular, as we go into Q2, we're shifting from a material to a labor.
And then again, relative to last year, there were some onetime overhead adjustments that occurred last year.
Speaker 9
Okay. Thank you very much.
Speaker 2
And I think the one other thing I would say, Ron, is in the last twelve years, Q1 has been our lowest margin quarter for 11 out of 12. And it's just a part of that's just the way we manage the business by increasing cost to make sure everyone's on the same sheet of music. But part of it's just also kind of the nature of the contracts and when these performance fees and revenues kick in.
Speaker 9
Got it. All right. Thank you.
Speaker 0
All right. Next question comes from Mr. Josh Sullivan. Your line is now open, sir.
Speaker 2
Good morning. Good morning. Kind of a related pricing question, the thrust into machine learning and IoT tech wise, these appear to be more commercial like products and services. Can you talk about how the customer is responding or evolving? Are they receptive to commercial pricing such as more service based models?
I think in the prepared remarks, you might have mentioned that you had a service model on the COVID masks you were doing? That's part of our longer term strategy. We just see that in so many of the commercial world that we see as a service type models dominating, puts the control of the resources in the hands of the contractor to best apply resources to the opportunities. It also generally are faster deployments and brings a total solution to the customer, a combination of hardware, software and services. And in the federal world, obviously, they've gone to the cloud, which is in essence a data center as a service.
And we're seeing increased interest. I wouldn't say it's a flood gates have opened yet, but there's definitely increased interest and we think that will be a growing trend. And that's why we've been investing productizing our services and combining them with our hardware and software. And that's been one of the key focus areas that Carrie and her team have been working on. Carrie, probably have some additional color you'd like to add on that.
Speaker 4
Sure. Just a couple of specific examples. We're already selling our iNet product as a service. It can be provided a software service or a platform as a service. I mentioned that decontamination is a service that we're currently looking at already.
We're also looking in areas of cyber security such as hunt as a service where you go out basically and do a comprehensive threat assessment and you take a look at the supply chain and we can sell that as a service. And we have a product offering that's called Notify where we sell knowledge as a service. So that's a critical business model for our company.
Speaker 2
Got it. And then in the prepared remarks, mentioned key executives you've brought on board Can give us any update there, any contributions so far that we've seen? These have all been senior executives that we brought on board over the last quarter in key federal markets, cyber intel, space geospatial and defense C5ISR. And they've had big impacts already, obviously helping us position us for bid and proposal, but also in longer term strategy of how we further develop and productization.
Carrie, you probably can have a few things you'd like to say about that as well.
Speaker 4
Certainly. We've done several press releases on the team that we brought in. We brought in people on the business development side, on the operations side and on the recruiting side. There are folks that are steep with military or intelligence domain expertise as well as deep industry expertise in the federal space.
Speaker 8
Got it. Thank you.
Speaker 2
Thank you, Josh.
Speaker 0
Next question comes from Louis DiPaloma.
Speaker 11
Chuck, George, Karen, David, good morning.
Speaker 2
Good morning. Can
Speaker 11
you talk about the resiliency of your critical infrastructure division during this period that you referred to as the new abnormal? And if state and city budgets become under pressure, how would your business be impacted?
Speaker 2
Okay. Yes, great question. So very few of our contracts come directly from states. Most of them are from special taxing districts and agencies at the county, city and cross county levels like airports and transit districts, which tend to cross city lines and county lines, etcetera. And most of the programs that we're on are bond funded, which you don't really stop.
They have dedicated lines of financing. So what we saw in the global financial crisis, which is fairly similar to this, it tends to be a lagging economic indicator. In 2008 for us was a record year, only exceeded by 2009 and only further exceeded by 2010. What we're seeing in the infrastructure business over the last, say, couple of years is a pullback by a lot of companies that did it and a lot of mergers and acquisitions that's resulted in generally fewer competitors going after the work. And so I think that will continue.
The budgets clearly are going to be impacted at the state and local level due to reduced traffic volume. A lot of that is going to depend on how quickly things come back. So we think the focus of those communities will be on how quickly can I build ridership back up in my transit system at my airport, at the parking decks? And a lot of that is going to go into how confident the public is that they can do that safely. And hence, that's our pivot, which plays into the transformation we were already doing in that marketplace to be able to give not only the physical solutions to help provide physical separation for passengers and people waiting in queues, but also the technology solutions that help identify people are showing the symptoms of COVID, having the rapid testing capability to prove if they have it or not.
And we think that will be a growth area. Because it will be important to get the public confident and back using the infrastructure and going to work and going to restaurants, etcetera. Teri, anything you'd like to add to that?
Speaker 4
Yes. Our critical infrastructure proposal volume has gone up. If you look quarter over quarter, we submitted two thirty seven million in last quarter. And this quarter, we submitted $245,000,000 So what we're seeing is continued demand for the areas that we're involved in. The other thing is, nearly all of our programs in Critical Infrastructure were deemed mission critical and are still performing despite COVID.
And finally, the COVID offerings that I described, particularly the integrated personal screening system, those are going to be offered through our critical infrastructure sector with a significant focus on both rail and transit and aviation market areas.
Speaker 2
I think the other trend that we've seen, which is a good news, bad news story, kind of bad news for us as a society is that the cyber attacks on infrastructure and citizens and businesses and governments haven't reduced. In fact, in many measures they've increased. So I think that's going to be another area of increased focus that we're just going to have to protect these assets, both on the IT side, the information technology as well as the operational technology OT side. So those for companies like us that provide those services and products and software, I think that could be another growth area.
Speaker 4
Thanks.
Speaker 0
Next question comes from Justine Donati. Your line is now open.
Speaker 2
Hi, thanks for taking my question. You talked about your ability to redirect employees. Can you just talk a little bit more about if that's in one segment more than another? Yes. So it all obviously it gets down to each open slot we had and each employee's specific skills and how they matched up skill wise and in some cases geography wise or time zone wise.
And so when you have folks like with software programming skill sets that are have a lot of capabilities in cloud migration or AI algorithm programming, or even in areas of design on critical infrastructure or construction management, some of those skills. A lot of those folks were transferable and we were able to make movements from one unit, one sector to another or within a sector from one program to another program. And that's the primary reason. And because we can we have such great linkage and synergies between our critical infrastructure and our federal solutions and within the six market areas, These were cross unit calls that were taking place nearly daily and at the beginning of this. And we asked why the team was able to agilely place people so quickly.
Carrie, you expand on that a bit.
Speaker 4
Yes. I agree, Chuck. We have a very robust redeployment system. And a couple of times a week, sit down and we go through program by program, person by person and try and align the skill sets. We've been very successful in redeploying people.
So we have extremely few that we have had to furlough. And those few that we did furlough will come back this year, and that was primarily on our vehicle inspection contract just because the inspections are getting deferred to the latter part of the year. But our redeployment program is very successful.
Speaker 2
Great. And then just as a quick follow-up, what percentage of your federal segment has cleared personnel where they might not be able to be redirected? So the specific question is, what percent of our personnel are cleared that could not be redirected? Yes, I guess just as trying to understand if those workers would not be able to be repurposed if they're doing shift work or anything like that? Yes.
Okay. In some cases, the customer didn't want employees to be redirected because they want to make darn sure when they go back to full shift if everybody is still available. But some of them have been able to redirect or work one week every other week on another contract. Carrie, you can probably give a little more color on that. But those are the kinds of things that we've been doing.
Speaker 4
Sure. We have about 3,000 folks over 3,000 that are cleared. Most of our classified customers have gone to one week on, one week off. But the recovery will be built through the CARES Act. We're very fortunate, only 1.4 of our revenue falls in that category.
And it's all going to be recovered through CARES Act from a revenue perspective.
Speaker 9
Thank you.
Speaker 0
All right. Next question comes from Joseph DeNardi. Sir, your line is Yes. Now
Speaker 2
Thank you. Chuck, just a quick follow-up. You mentioned a couple
Speaker 6
of times the amount of business that is funded through a bond issuance. Can you actually quantify that? I mean, how much of the Critical Infrastructure segment revenues comes from something like that, if you got it handy? Thank you.
Speaker 2
Yes. I don't have that on tip of my tongue, Joe, and I'll ask Carrie if she does. But what I would tell you is you get over about $100,000,000 in contract size and basically 100% of those programs are either bond funded or P3 funded. Those aren't coming out of operating funds of an airport. So any or a transit agency or road and highway district.
So capital projects in the infrastructure side are generally in The U. S. Almost exclusively bond funded. Overseas, you can have a combination of different sources. And that's why it's very important to be on a nation's most critical asset list.
Carrie, do you have any additional details?
Speaker 4
I don't have that number handy, Chuck.
Speaker 2
Yes. Can look that up for you, Joe.
Speaker 6
Yes. Thank you very much.
Speaker 0
That is all the time we have for questions. Thank you all for joining. Please, presenters, please stand by.
Speaker 2
Thank you. Thank you everyone.