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PAE Incorporated (PAE) Q1 2020 Earnings Call Transcript

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PAE earnings call for the period ending March 29, 2020.

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PAE Incorporated (PAE)
Q1 2020 Earnings Call
May 9, 2020, 8:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to PAE's First Quarter 2020 Earnings Conference call. My name is Lauren and I will be your conference operator today. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for PAE. Please go ahead, Mr. Zindler.

Mark Zindler -- Vice President of Investor Relations

Good morning, and thank you for participating in PAE's first quarter 2020 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on the Investor Relations section of our website.

Joining me today to discuss our business and financial results are John Heller, PAE's President and Chief Executive Officer; and Charlie Peiffer, our Chief Financial Officer. Following our prepared remarks, we'll close with a question-and-answer session. Management may make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in our SEC filings. Please refer to our earnings press release for PAE's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements.

Management will also discuss non-GAAP financial measures during this call 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 John Heller.

John Heller -- President and Chief Executive Officer

Thank you, Mark, and good morning everyone. Thank you for joining us today on our call. We greatly appreciate your interest in PAE. Before turning to our strategic priorities and business results, I'd like to address the COVID-19 pandemic. First, I hope your families and loved ones are healthy and I want to thank all those who are working to keep us safe, particularly the healthcare community. I also want to take a moment to thank our customers, suppliers and our employees for their tireless efforts, obviously, this has been an extremely challenging time that has affected our global community.

I have never been so proud to lead PAE, our teams have responded to this crisis professionally and with tireless dedication all the while caring for their families. While the country is not out of the woods, I remain as optimistic as ever about PAE's business and growth opportunities. Our top priority has been protecting the health and safety of our employees, contractors, and customers. We have implemented strict social distancing and cleaning procedures to maintain a safe workplace. Our second priority has been maintaining business continuity for our customers. To that end, where possible, we have moved to a combination of shift work and tele working solutions to continue supporting the critical missions of the US government.

I'll now provide a brief overview of the impacts we are experiencing due to COVID-19. First, I'm extremely grateful that the impact has been very manageable. Like all companies, we have experienced disruptions to our business, we have seen the biggest impacts in areas such as transportation of personnel and materials to customer sites, timing impacts to various training programs and other logistics operations. However, through utilization of the flexible work solutions I mentioned and through the mechanisms that the CARES Act provides, we have minimized the impact to our financial plan.

We were also fortunate to win two COVID-19 response contracts, supporting the State of Georgia and the Canadian government as outlined in our press releases dated April 13 and April 27, respectively. These contracts represent turnkey alternate care solutions including providing boots on the ground support to aid the pandemic response efforts. Furthermore, these contracts have helped mitigate the financial impacts of COVID-19 to our core business.

Moving on to our strategic priorities for the year. If you recall, in our fourth quarter update I provided our top three priorities, driving top line growth, expanding profit margins and lowering our cost of debt. I'll provide an update on each of these priorities, starting with top line growth. Our business development engine is running at full capacity. We are humbled to witness how the US government remains steadfast in moving forward even during this pandemic with programs to support the national security and federal civilian missions.

We have participated in RFP activity that is on track with our goals for the year. Our original estimate for 2020 proposal submissions was more than $12 billion and we feel confident that we will meet or exceed that goal. With the qualified pipeline of about $35 billion, there is no shortage of opportunities. In the Global Mission Services segment, we have seen the BD pipeline to greatly expand across expected and emerging opportunities, specifically, we are awaiting $5.4 billion in awards for the GMS business area. In our National Security Solutions segment their percentage of the consolidated pipeline has grown to almost 50% of the total, aided in large part by a strong and growing IDIQ portfolio, which is driving attractive growth opportunities.

Moving on to margin expansion, as you saw in our earnings release, we delivered very strong margins in the quarter. Although, we do not anticipate delivering comparable margins for the full year, first quarter performance is a great indication of what this business can deliver over the long term. One particular focus area I'd like to discuss is the fixed price and time and material work we're bidding and winning in our NSS segment. Examples include training contracts for counter-terrorism as well as construction surveillance and security monitoring services. Based on the complexity of the work, we are delivering strong increased margins relative to our consolidated margin. We will continue to bid this type of work and expand our NSS portfolio.

Charlie will provide further details about first quarter margins in his remarks, but I'll note that we are keenly focused on driving margin expansion and taking a very conservative approach to build our pipeline and bid on programs that will expand our capabilities and margins over time. Lastly, we are focused on paying down and refinancing our debt. M&A is certainly an integral part of our long-term growth strategy. But in the near term, we are focused on strengthening the balance sheet through lowering our cost of debt and extending the maturities. Charlie will elaborate further in his remarks.

With that background, I will now turn to our first quarter results. We anticipated that revenue would be back-end weighted due to some contracts that were not renewed during 2019. Actual results came in about 5% below our internal plan due to the aforementioned impacts from COVID-19 and lower non-labor driven revenue. Due to the fact that the vast majority of the variance relative to our plan will be timing related, and coupled with the two COVID-19 response contract awards previously discussed. I am pleased to note that we are reiterating our full year revenue and adjusted EBITDA guidance and increasing our free cash flow expectations from a prior range of $80 million to $90 million, up to $100 million based on our outlook for the remainder of the year.

Moving to award activity, contract awards were modestly better than plan. We generated $654 million in net bookings for the quarter and $2.54 billion on a trailing 12-month basis. First quarter awards were primarily new business and contract extensions on existing business, allowing us to de-risk the new business and recompete requirements for the year.

After a competitor's unsuccessful protest, we received a $400 million single-award IDIQ new business win supporting the Department of Justice, along with several notable contract extensions supporting our embassy work in Iraq as well as undersea testing services for the U.S. Navy. These two and other contract extensions have further reduced our revenue recompete risk for the year.

In addition, we won several noteworthy multiple award IDIQ programs during the quarter, including the NOAA ProTech Weather Domain contract in the previously announced GTACS II C4ISR contract vehicle. Moreover, we are off to a great start in the second quarter. Leveraging our proud history supporting the Ebola crisis in Liberia in 2014, PAE is offering comparable assistance to federal and state government agencies to augment their response to the COVID-19 crisis.

Our activity includes the alternate care facility for the State of Georgia and supporting Canada's health preparedness efforts alongside a joint venture partner. These wins exemplified PAE's differentiation, our unique ability to quickly mobilize and offer turnkey solutions to customers in critical need.

Furthermore, our GMS segment has been awarded one of eight positions on the Air Force Civil Augmentation Program IDIQ vehicle, also known as AFCAP V with a combined ceiling of $6.4 billion. We have delivered about $100 million of cumulative revenue over the past three years, delivering worldwide contingency and humanitarian support and are optimistic about our potential for comparable run rates under the new contract vehicle.

Moving on to the federal contracting environment, we saw strong RFP activity in the first quarter and expect that to continue throughout the 2020 calendar year. Moreover, we are seeing robust government spending aligned with PAE's core capabilities such as training, infrastructure, aviation and humanitarian initiatives. So far this year, we have not seen a significant slowdown in award activity due to COVID-19 or other factors. We have several important new business and recompete contracts that we anticipate being awarded over the balance of the year and we'll continue to update the market with notable win announcements.

In closing, we are encouraged that our end markets provide a resilient and stable stream of revenue and cash flow, largely immune to business disruption. Furthermore, our contract and customer diversification play a pivotal role in protecting against downside risk in an uncertain environment. We continue to be well positioned for a strong 2020, supported by a robust pipeline focused in our large and growing addressable market. Additionally, we believe that the government services market backed by strong federal spending provides a solid investment platform. Furthermore, PAE continues to trade in an extremely compelling valuation relative to our peer group at less than 8 times expected 2020 EBITDA and a free cash flow yield of about 13% based on our current outlook.

With that, I'll turn the call over to Charlie for an overview of our first quarter 2020 financial results, more detailed key business development metrics and 2020 financial guidance.

Charles Peiffer -- Chief Financial Officer

Thanks, John, and good morning everyone. I'll start with a brief discussion of the financial impacts of COVID-19 then move on to our first quarter results. As John discussed, we've been fortunate that the impact of COVID-19 has been very manageable. Similar to what we experienced in the last government shutdown, about 95% of our direct workforce are working and billable due to the mission critical nature of our business. In addition, we are utilizing the CARES Act where recoveries for our employees who are in a ready state but are unable to access their normal workplace or telecommute due to COVID-19 restrictions.

Moving on to first quarter results, revenue of $617.3 million came in below our expectations due to impacts from COVID-19 and lower non-labor driven revenue. Relative to the first quarter of last year, revenue decreased $56 million due to several factors including timing related impacts on billable materials task orders for incremental labor, the recompete loss of certain contracts and an approximate $14 million impact from COVID-19. These items were partially offset by on-contract growth and new business programs.

Many of these factors were anticipated when we determine our revenue guidance for the year. Our variance versus plan was only a 5% decline. About half of which was related to timing on material deliveries and half due to COVID-19. The vast majority of the variance against the plan was in our GMS segment.

Adjusted EBITDA at $41.6 million or 6.7% of revenue for the quarter was slightly above our internal plan despite the revenue impact from COVID-19. Adjusted EBITDA margins benefited from increased profitability on new business programs and higher non-labor revenue in the prior period. Our adjusted EBITDA for the first quarter backed out roughly $63.7 million of one-time non-recurring operating expenses. The vast majority of which are M&A expenses relating to the business combination transaction that closed in February of 2020, in which PAE became a publicly traded company.

Operating income for the quarter was $7.5 million compared with operating income of $14.4 million in the prior quarter -- prior-year quarter. The decrease resulted from lower revenue volume partially offset by a corresponding reduction in cost of revenues and increased M&A and public company SG&A costs. Net loss for the quarter was $4.8 million or $0.08 per diluted share compared to a net loss of $5.7 million or $0.27 per diluted share in the prior quarter. The decrease in net loss resulted primarily from the factors impacting operating income.

Next, I will turn to our segment results, Global Mission Services or GMS revenues for the quarter of $457.4 million, decreased $47 million or 9.3% compared to the prior-year quarter. The decrease was due to timing related impacts on billable materials and task orders for incremental labor and an approximate $12 million impact from COVID-19. This decrease was partially offset by an increase in on-contract growth and new programs. GMS adjusted operating income decreased year-over-year primarily due to lower revenue and increases in SG&A expenses. However, GMS adjusted operating income margins improved year-over-year due to a favorable revenue mix in the quarter.

And our NSS segment revenues for the quarter of about $160 million decreased about $9 million compared to the prior-year quarter. The decrease was attributable to the previously mentioned recompete losses and COVID-19 impact. All of which was partially offset by new business and on-contract growth. Adjusted operating income improved to $14.3 million or 9% of revenue in the quarter, driven by improved performance on existing contracts and increased profitability on new business programs.

Turning to the cash flow statement, net cash provided by operating activities was $10.9 million for the first quarter. Normalizing for one-time M&A related costs, cash provided by operating activities would have been about $35 million for the quarter. We did not experience any adverse impacts to cash collections from COVID-19 as DSO was 61 days for the first quarter, which is in line with historical averages.

Capex for the quarter was approximately $400,000, resulting in a free cash flow conversion yield of 99%, well above the historical averages. As I discussed on our fourth quarter call, in conjunction with the business combination transaction, the company paid down approximately $137 million of the second lien debt on its term loan facility in the first quarter. PAE ended the quarter in a strong liquidity position with about $100 million in cash and had not drawn on our revolver, our credit revolver.

Now I'll briefly recap our bookings and backlog metrics for the quarter and for the year. For the quarter, we generated $654 million in net bookings or 1.1 times revenue. And for the trailing 12 months, we generated $2.5 billion in net bookings or 0.9 times revenue. The vast majority of the awards were for new business and on contract growth. Total backlog at the end of the quarter was $6.4 billion, of which $1.2 billion was funded. And as of the end of the first quarter, the total and bids submitted and awaiting award is approximately $7 billion. In addition, we plan to submit bids of more than $11 billion throughout the remainder of the year.

Moving on to 2020 financial guidance, based on our first quarter results and our outlook for the remainder of the year, we're reiterating the full-year 2020 guidance we provided in March. For fiscal year 2020, we expect revenue to be in the range of $2.75 billion to $2.85 billion. As of the end of the first quarter, approximately 89% of our revenue guidance at the midpoint is at backlog, 7% from recompete contract and 4% from new business awards. We continue to expect adjusted EBITDA to be in the range of $170 million to $178 million.

As we discussed on our prior earnings call, pro forma for public company costs, this represents a year-over-year growth rate of 6.3%, at the midpoint, assuming $3 million in estimated public costs. For the remainder of the year, we continue to anticipate revenue to be moderately back-end weighted. We anticipate that second quarter revenue will be -- will see a greater COVID-19 impact, partially offset by new business awards and should be in line with first quarter levels. We anticipate sequential revenue increases in the third and fourth quarters. We expect comparable adjusted EBITDA margins in the second quarter and then the third and fourth quarter margins are expected to decline as we ramp up new business and see an increase in our non-labor revenue. All of which is expected to deliver at least 20 basis point margin increase for the full year, consistent with guidance.

With regards to cash flow generation, I am pleased to announce we are increasing our expectation to achieve approximately $100 million of free cash flow from a prior range of $80 million to $90 million. This implies generating about $30 million in free cash flow in each of the next three quarters and is based on the existing capital structure. As John mentioned in his remarks, we continue to evaluate refinancing opportunities.

Currently, we believe the credit markets have not rebounded to a level where completing a refinancing today is prudent and in our best long-term interest. However, we are continually monitoring the market and refinancing the debt remains our number one capital structure priority. Other key assumptions for our 2020 guidance are available in our first quarter earnings presentation on the Investors Section of our website.

With that, operator, let's open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Josh Sullivan with The Benchmark Company. Your line is now open.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey. Good morning, John, Charlie, Mark. Congratulations on the quarter. And hope you guys stand safe.

John Heller -- President and Chief Executive Officer

Thank you.

Josh Sullivan -- The Benchmark Company -- Analyst

Your first question, can you help us think about the cadence for the rest of the year. What's in backlog just driving that growth in the second half and just how should we think about that?

Charles Peiffer -- Chief Financial Officer

Good question, Josh. The way to look at the key drivers for the second half can be broken down in a couple areas. Number one, in second half, you will see an increase in on-contract revenue growth. So, this increase is coming from what we already have in backlog. The second is the non-labor revenue really was pushed to the right. And so you're going to see that coming back in the second half of the year. The COVID-19 revenue that was pushed to the right as well. I believe we've been conservative on how we've looked at COVID-19.

The recompete wins and extensions are part of what's in the second half as well. And then the new business awards will represent probably about one-third of that. And as you look at new business, to John's earlier point, we said we had $7 billion in evaluation, over $2 billion of that is new business. So, there is a significant amount in evaluation that would be a driver for new business revenue.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then just within that bid pipeline, is your competition set changing in any way, is the strategy evolves neither segment. And what I'm trying to -- I guess, I'm trying to understand PAE is in a unique position. I'm curious if you're seeing more of the same competition in bids or if there is any change from who you come up against and some of the endeavors that you're pursuing?

John Heller -- President and Chief Executive Officer

Yeah. Hi, Josh. Thanks for joining. Just to address that question, I think, we see very different competition between our two business segments. So, on the GMS side, we pretty much see the same four, five competitors and that hasn't changed between 2018, 2019 or 2020. And our expectation is that's going to be pretty steady even looking into 2021.

On the NSS segment, it's been our objective to expand strategically into new markets on the NSS side and we've been successful doing that, both through acquisition. But more recently, organically, great example would be construction, security and surveillance market where we've expanded to supporting companies like Microsoft and Amazon. And they are -- as we enter these new markets we do see different competitors, very different from what we see on the GMS side and we think the -- kind of the overall cost structure of PAE makes us very competitive in those market segments, as well as our -- the flexible business structure that we have allows us to move quickly, respond very attentively to those customers, and have a higher win rate on the NSS side. And that's been our strategy for the last few years and we don't see that changing.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then just one on free cash flow, raising the profile in this environment is great. Can you just give us some color on the puts and takes on the different buckets within free cash just throughout the year?

Charles Peiffer -- Chief Financial Officer

Yes. The drivers for the performance for the remaining three quarters are, first of all, continued improvement in our DSO. So, there will be working capital reduction that will help drive that. Second is that the first quarter was impacted by the impacts of the transaction. So, as we've discussed before, if you adjust for the transaction expenses, there is another -- we go from $10 million from operating cash flow to $35 million.

The second is that -- or next is that we will not have any cash taxes, will not be cash tax, we'll not be paying cash taxes in 2020. And then also as a result of the CARES Act, we will be deferring $33 million of payroll taxes that will wind up being 50% of that paid in 2021 and the remaining balance being paid in 2022.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then, I mean as far as the M&A market right now, I know debt repayment is the focus, but can you give us any commentary on what you're seeing in the market or maybe when you might think about it at this point?

John Heller -- President and Chief Executive Officer

Sure. I mean, obviously we still see M&A is an important element in the overall strategic direction of PAE, we've been successful with in the past and we're going to continue to look at options going forward. But I think with -- as Charlie mentioned with the debt markets, not really supportive of what -- in a kind of a beneficial way of what we can do to actually execute those kind of deals, we've really put a pause on the M&A just focused on operations, focus on cash right now, waiting for the debt markets to return to something more normal where we can see a light on refinancing our own debt as a priority, and then looking at strategic add-ons after that.

But we -- we are hopeful that that will turn around in the coming months, but right now we don't see that. What we are seeing, we've seen several deals get pulled back and the process has not move forward. We have seen some deals go forward where buyers are willing to put a lot of equity on the table and -- or are in a very low debt position that they are able to execute something like that. But I will reiterate we still see this as a great part of the growth strategy for PAE and we expect to be active as the market recovers.

Josh Sullivan -- The Benchmark Company -- Analyst

Okay. Thanks for time.

John Heller -- President and Chief Executive Officer

Thanks, Josh.

Operator

Thank you. Our next question comes from Ashish Sabadra with Deutsche Bank. Your line is now open.

Ashish Sabadra -- Deutsche Bank -- Analyst

Thanks. Just -- good to see the momentum in new wins, but I just had a question about the book-to-bill ratio that has come down a bit and particularly on the backlog side, the NSS backlog was down modestly compared to end of 2019. Just wondering just given the solid momentum in new wins, is this just a matter of timing, any color on that front?

Charles Peiffer -- Chief Financial Officer

Yes. Ashish, this is Charlie. Yes, it's really driven by timing. So, if you look at the amount of awards that we've seen in the first quarter for NSS has been very small, there is a fair amount of activity that we'll be starting in second quarter and third quarter, which really will be the drivers for the new business in NSS.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's helpful.

John Heller -- President and Chief Executive Officer

Maybe also on the NSS side -- Ashish, good morning. Thank you joining. But I think on the NSS side, we also had a couple recompetes in 2019 that went small business. So we were unable to bid on those. And as a prime -- where we were a prime in the past we had acquired some of those contracts. So, I think that had some impact as well.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's helpful. And it's good to see in an environment where most companies have to withdraw guidance or at least lower guidance or able to reiterate revenue guidance. So, just wanted to better understand, your ability and despite the headwind that you saw in the first and some expected second quarter, the confidence that you have in the full-year guidance, is that because of the deep activity and the momentum that you're seeing in the business? Any color on that -- any incremental color?

Charles Peiffer -- Chief Financial Officer

The basis for the guidance really is the ability to continue to have on-contract growth which is these are things -- these are contracts that we already have in backlog. Some of it may be just that we won the contract recently and now you're dealing with a normal run rate when you look at first half versus second half. And then we do have activity that normally from a timing standpoint may be more weighted toward the back end of the year and that's why you see some of that given some of the activity on some of the IDIQs.

And then as stated earlier, the new business opportunities that we have are quite large and feel that we have a very good opportunity to close on the new business assumptions we have and the targets. And with what we have in evaluation and what will be added to in evaluation in the second quarter puts us in a good position to achieve the new business wins that we have forecasted.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's very helpful.

John Heller -- President and Chief Executive Officer

Ashish to Charlie's point, we have -- besides the number that Charlie mentioned that in evaluation we are -- we currently have about $2 billion of active proposals and most of that, vast majority of that is new business.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's very helpful. Thanks, John and Charlie. And maybe just a quick follow-up on that would be coming into the year, there was -- 85% of the revenue was already budgeted. There was like around 5%, 5.5% supposed to come from new service award and 9.5% from recompetes. How do you think about those numbers now? And is there any potential concern about any of those new awards getting pushed out because of COVID, if you could just provide any color on that front.

Charles Peiffer -- Chief Financial Officer

Sure. So, if we look at the recompetes, normally, you're going to enter a year with anywhere from 10% to 14% of your volume in a recompete status. As we exited the first quarter, you could see that our recompetes are now down to 7%. And that is driven by the fact that we had received some extensions in the first quarter that impact that number. I would expect that number to decline further, as we get further into the year.

As far as delays associated with new business, we are conservative in the win rates we have used, and we do not include all of the new business in the plan. So what we try to do is, number one, use a conservative win rate, and then number two, we do not include everything that we're bidding on into the plan. So that gives us an opportunity to have a way of filling some gaps, if in fact we do see delays. So, it's about balancing the portfolio and looking at it from both the win rate perspective as well as the volume.

I don't know if you want to add anything else, John.

John Heller -- President and Chief Executive Officer

No, that was good, Charlie. Thanks.

Ashish Sabadra -- Deutsche Bank -- Analyst

And maybe one final question from me was just around capital allocation, you talked about delevering in the near term, is there a way to think about leverage targets in the near term. Also, is there an opportunity for you to do any kind of refinancing, you do have second lien loan, which is at much higher interest rate. Is there any opportunity for refinancing and lowering your debt expense -- interest expense? Sorry, thanks.

Charles Peiffer -- Chief Financial Officer

From a capital allocation perspective, our primary focus obviously is lowering the cost of debt and our leverage ratio, as a result of that. We are taking somewhat of a breather in M&A, but it's more of a pause than anything else. As we look at refinancing, as we discussed in the year-end call, we did have a plan to refinance the debt and then the pandemic hit and everything was put on hold. We've had numerous conversations with various banks looking at refinancing the debt. Today, we just don't see an action like that is prudent because of the terms. We really would not necessarily see a reduction in cash interest. And therefore, I feel we're in a better position to wait to see how the market responds before we make a commitment on when and how we refinance.

Ashish Sabadra -- Deutsche Bank -- Analyst

Thanks. And again, good to see a solid momentum in the business and congrats. Thank you.

Charles Peiffer -- Chief Financial Officer

Thank you, Ashish.

Operator

Thank you. Our next question comes from Matt Sharpe with Morgan Stanley. Your line is now open.

Matt Sharpe -- Morgan Stanley -- Analyst

John, Charlie, good morning, and thanks for taking my questions here. Charlie, the first one...

John Heller -- President and Chief Executive Officer

Good morning.

Matt Sharpe -- Morgan Stanley -- Analyst

Good morning. Charlie, the first one here is for you, I just curious on adjusted EBITDA margins, the expansion for Q1 was pretty notable, that's year-over-year at 6.7%, say, here. And then you've reiterated the guide for the year, which implies that the mid-point, I think, 6.2%. So, could you help just unpack Q1 for us, help us understand a little bit more what sort of drove the relative outperformance and then maybe you could give us a sense of what the cadence for the remainder of the year might look like?

John Heller -- President and Chief Executive Officer

Charlie?

Mark Zindler -- Vice President of Investor Relations

Charlie, we're having trouble hearing you.

Operator

And pardon me gentlemen, it looks like Charlie's line has disconnected.

Mark Zindler -- Vice President of Investor Relations

Okay. John, would you like to take that or let me [Phonetic] to take it?

John Heller -- President and Chief Executive Officer

Yeah, go ahead, Mark.

Mark Zindler -- Vice President of Investor Relations

Okay. Thanks, Matt. Yeah, I mean, the primary driver for Q1 was, I'd say, in general, it's revenue mix. As we mentioned, we did see some non-labor push to the right. So that coupled with improved performance on existing contracts in the NSS segment as well as the ramp up of the new business that we won late in the third quarter. Those were all the key drivers in terms of the margin expansion in Q1. Q2, as Charlie mentioned in his remarks, we're anticipating comparable numbers and very much so for the similar reasons.

And then in the back half of the year as we start to generate some of that non-labor revenue, those ODCs, that revenue mix is going to contribute to a slight decline such that we're going to come back in at that 6.2% guidance that we reiterated this morning.

Matt Sharpe -- Morgan Stanley -- Analyst

Got it. Thanks. That helps. And then I just have one, I know we talked about the pipeline in new awards quite a bit here, but -- and with particular focus on 2020, I was hoping maybe you could give us a sense of what the 2021 pipeline is shaping up to look like and what the recompete levels look like at that point in time?

John Heller -- President and Chief Executive Officer

Yeah, no, we actually have a very good start to the overall new business pipeline for 2021. As I mentioned, and I think Charlie reiterated, we're seeing now, pretty consistently our ability to bid, say, in that $12-plus-billion a year in total bids. And we are -- our outlook for next year is also consistent with that. And this year we're expecting about over $12 billion as well, and last year we saw $13 billion. So, we're starting to see that consistent cadence on bidding and at the volumes that we need to grow the business.

And the fact that this year already we have about $7 billion in evaluation another $2 billion in proposal. We feel good about that and obviously that -- some of that's going to be back-end weighted, so it's going to have an oversized impact to 2021, with just a partial year to 2020. So that gives us some momentum as we look between 2020 and 2021 on the growth side.

When you talk about recompete every year somewhere between 10% and 14% of our business to go through recompete just given the lengths of our -- the typical lengths of our contract being around seven years across our portfolio. So, and it's been consistent if you go back to six-plus-years that Charlie and I have been here at PAE, we've had about a consistent run rate of between that 10% and 14%. We saw the same this year, although that's decreasing pretty fast and now below 10% for the year. But our expectation is, we'll be in that same range for next year of about 12% to 14% of recompete.

Matt Sharpe -- Morgan Stanley -- Analyst

Got it. Thanks. And then just one more here, I wanted to briefly touch on the budget environment, obviously as we head into the back half of the year, it's going to be more of a talking point, we got a potential CR on the horizon in an election. Maybe if you could just give us your high level thoughts on budget growth from here and then what if any risk exists toward Q4 for CR and how that might impact the business?

John Heller -- President and Chief Executive Officer

Sure. Our outlook right now is that the government's focus is on shoring up the economy, and I'd say the same for foreign governments as well. We're seeing outsized spending that has come through various bills from Congress and the President is very supportive of that. We are expecting that that spending will continue through this fiscal year unabated. And the momentum for continued stimulus and continued spending, I don't think that's -- the priority right now is just putting the government as part of the stimulus for the overall economy.

And we expect that that will carry forward into 2021 and potentially even into 2022 regardless of party. The economy is going to be the number one priority and stimulating that economy and the government is going to use every tool they have in their bag to help stimulate that. And I think we're going to see that trickle down into strong government services spending.

Matt Sharpe -- Morgan Stanley -- Analyst

Got it. Thanks. Very helpful. I'll jump back in the queue here.

Operator

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back to Mr. Zindler for any closing remarks.

Mark Zindler -- Vice President of Investor Relations

Well, thank you very much for your continued interest in PAE and if you have any questions please don't hesitate to give me a call. Thank you and have a great day.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Mark Zindler -- Vice President of Investor Relations

John Heller -- President and Chief Executive Officer

Charles Peiffer -- Chief Financial Officer

Josh Sullivan -- The Benchmark Company -- Analyst

Ashish Sabadra -- Deutsche Bank -- Analyst

Matt Sharpe -- Morgan Stanley -- Analyst

More PAE analysis

All earnings call transcripts

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