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PAE Incorporated (NASDAQ:PAE)
Q2 2020 Earnings Call
Aug 6, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the PAE's Second Quarter 2020 Earnings Conference Call. My name is Cindy, and I will be your operator today. [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 second 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 measures are contained in the press release and investor presentation issued earlier today.

And now I'll turn the call over to John Heller.

John Heller -- President and Chief Executive Officer

Thank you all for joining us this morning for our second quarter 2020 earnings conference call. First, I hope your families and loved ones are healthy and are adjusting as best as possible to the current environment. Today, I will cover several topics of importance, including a summary of the impact of COVID-19 in our business, our qualified bid pipeline and specific areas of strength, our perspectives on future federal spending and an overview of second quarter results. Charlie will further elaborate on second quarter financial and operating performance and provide commentary on our financial outlook for the remainder of the year.

Before I dive into these topics, I'd like to start with a broader overview on the strength and core fundamentals of the business. I am very excited about how the business is performing. We are successfully executing our strategy to win and deliver our higher margin programs. The pipeline is strong with potential to further expand margins and our contract award win rates are exceeding our plan. Furthermore, we're driving higher margins on our existing programs and generating strong free cash flow. Although we're experiencing temporary disruptions from COVID-19 that have created headwinds primarily to lower margin nonlabor revenue, we are successfully building the foundation for continued organic growth once we put COVID-19 behind us.

Moving on to the agenda topics. I'll start with COVID-19 impacts. While operating our business amid this pandemic remains a challenging endeavor, we have adapted and made the most of these difficult conditions. The disruptions to our business have been a slowdown in our logistics operations and labor driven training programs and certain business process outsourcing programs have been postponed. But all in all, our business has been resilient to this environment. Over 95% of our direct workforce continues to work and charge their time. We have seen a moderate slowdown in award activity, but our pipeline remains robust, and we have over $8 billion in bids awaiting award.

Charlie will discuss in greater detail, but the net effect has been a decrease in our revenue forecast, but a sizable increase in margin due to driving increased volume on higher-margin programs and the majority of the COVID impact affecting lower margin non labor revenue. Next, I'd like to discuss our qualified pipeline in specific areas of future growth. The qualified pipeline remains steady at about $35 billion at quarter end. In our global mission Services, or GMS segment, we are seeing attractive opportunities across the Department of Defense and most notably with the U.S. Navy. Furthermore, we're excited about opportunities with USAID, NASA and Noah.

These new business opportunities have leveraged areas of significant strength for PAE, including test and engineering services, aircraft integration and global health capabilities. International Security Solutions, or NSS segment, the qualified pipeline has seen modest growth and is heavily weighted toward new business opportunities within a variety of customers supporting the National Security Mission, leveraging our training and counter-threat capabilities as well as our proven business process solutions. We are seeing a high-volume of attractive RFPs that we're excited about.

Representing opportunities for potential growth in higher-margin and higher growth areas of the government services market. These opportunities are natural extensions of PAE's existing business. Allowing us to utilize our past performance and capabilities in pursuit of new business higher up the value chain. I am particularly excited about several IDIQ vehicles, including GTAX 2, ETSC and Sata. We are anticipating bidding on numerous task orders that provide new revenue with margin expansion potential. Furthermore, we're seeing attractive opportunities in construction security in both the federal and commercial space as well as medical service programs that will drive profitable growth.

At the end of the quarter, we had about $8.3 billion in awards under evaluation and an incremental $1.3 billion in the proposal writing process. In GMS, we are awaiting over $7 billion in awards, which includes PAE's recently awarded $1.3 billion U.S. customs and border protection contract, which was protested. A little over $4 billion are recompete awards and approximately $3 billion are new business opportunities. In our National Security Solutions segment, we are awaiting about $1 billion in awards, the majority of which is new business in business process solutions and training-related programs. We remain on track to bid at least $12 billion this year. We bid about $3.5 billion in the first half of the year.

And based on our customers' respective schedules for RFPs, we believe bid activity will ramp-up in the second half of the year, and we hit our target. Our quarter ending September 30 represents the fourth quarter of the government fiscal year and typically represents significant spending for the government given the annual budget process. We anticipate bidding at least $8 billion in GMS and $4 billion in NSS for the full year. In total, new business represents nearly $10 billion of the $12 billion inspected in full year submissions. Next, moving to the strategic landscape. And with this being our last quarterly update call prior to the election on November 3, I'd like to take a minute to discuss our perspectives in terms of how we are thinking about various outcomes.

During the time that I have led PAE, one of our most significant accomplishments is how diversified we have built the business from a capabilities, customer and contract perspective. We go-to-market across 13 distinct and proven capabilities that drive significant market potential. In addition, no individual customer accounts for more than 22% of revenue, and the Department of Defense in total across Army, Navy and Air Force represents less than 35% of revenue. On the contract side of the equation, our largest contract represents 8% of revenue, and the top two contracts are only 14% of revenue.

Thus, if the federal government ships spending priorities away from defense and toward federal civilian agencies, we have built established businesses with the Department of State, Department of Homeland Security, Department of Justice, NASA and the intel community that can reap the benefits of any such reallocation of spending. With regards to DoD spending, we are well positioned. Less than 1% of our revenue is derived from war time or emergency o coding. The takeaway here is that PAE is a company that ensures mission-readiness for our customers. We're the team that keeps the lights on and safeguards the bases, facilities, embassies, you name it, operate smoothly.

Some of the work is not high profile, but it's critical to the readiness of our customers. It's resilient and not typically subject to budgetary fluctuations. Our core confidence in Training Solutions is a great example, a multitude of training programs are essential across DoD, Department of State, Homeland Security and Intel regardless of the environment. Moreover, geopolitical risk has not gone away and has likely increased during this fiscal spending period. Furthermore, we generally don't rely on spending programs that secure their funding from investment accounts that are traditionally much more volatile than O&M budgetary accounts.

As you'll note in our earnings presentation, when we look back at the period 2013 to 2019, which includes sequestration and the reduction of operations in Iraq and Afghanistan. We grew organic revenue at approximately 5% over this time period. Lastly, with regards to the longer-term federal spending outlook, we're confident we'll benefit from continued demand for contractors and outsourced spending. So in summary, regardless of the outcome of the elections, PAE is well positioned and diversified across a broad base of customers and capabilities. Next, I will turn to our second quarter results. Contract awards were generally in line with our expectations.

We generated $521 million in net bookings for the quarter and $2.6 billion on a trailing 12-month basis. Second quarter awards were spread fairly evenly among contract extensions, recompetes and new business. Notable awards including included the Eglin Air Force base recompete contract, managing aircraft and equipment maintenance and several new business opportunities, including the Marine Corps Air Station award in Iwakuni, Japan, supporting the U.S. Navy with systems maintenance, testing, in installation services. In our NSS segment, we were awarded new business on the Citrix three contract vehicle, providing counterthreat solutions to a national security customer.

In addition, we have won several COVID-19 response awards that will generate over $50 million in revenue this year, partially offsetting a portion of the COVID-19 revenue impacts. Subsequent to the end of the quarter, PAE also want to see on the $14 billion multi-award IDIQ contract for aircraft maintenance enterprise solution, a strategic sourcing vehicle for Air Forcewide contracted aircraft maintenance. We are one of eight awardees on the contract vehicle and anticipate task orders being awarded as early as the fourth quarter of this year. Next, I'll provide a brief update on the 1.3 billion customs and Border Protection Award.

As discussed in our press release dated May 19, PAE was awarded a 10-year, $1.3 billion contract with the U.S. customs and border protection to provide aircraft maintenance support services. PAE has been the incumbent on this contract since December 2009, and we have received very strong accolades and ratings from our customer. Following the issuance of the award, one of our competitors opted to file a protest, which is common in our sector. As a result of the protest, the agency is conducting further evaluation of the award. Our policy is to not take this award into backlog or bookings until the matter is resolved in our favor.

The next topic I'd like to cover is a brief overview of our financial performance. All in all, we have been successful mitigating the onetime revenue headwinds caused by the COVID-19 on profitability. Approximately 70% of the COVID revenue impact has been on lower margin materials. In addition, based on the increased profitability on existing and new programs in both segments and expense management, we are delivering much higher margins than our plan. Although we do not anticipate delivering comparable margins for the full year, first half performance is a great indication of what this business can deliver over the long term. In summary, PAE is operated as an essential business, continuing to operate and support our customers in a resilient market.

I want to again thank our global workforce of 20,000 people who have dedicated themselves to the mission success of our customers throughout the pandemic. Before I turn the call over to Charlie, I'd like to recognize that as our country faces several unprecedented challenges this year, we, at PAE, have not overlooked, the fight for racial justice. A national movement brought to the forefront in the past few months by passionate appeals for change. We are proud that our focus on diversity has been part of PAE's identity from the start and remains a strong core value inherent in our global workforce today.

Our progressive policies and practices supporting diversity have long reflected this deeply rooted sense of duty. The landscape has changed in 2020, we must take an active role in rejecting racism and social injustice in all its forms, dedicated to the positive change we hope to see now and in the future. Our commitment both here in the U.S. and around the world has been to support the help and development of freedom and individual rights of people of all colors and races.

With that, I'll hand the call over to Charlie for an overview of our second 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 high-level overview of our performance and then move on to a discussion of the second quarter financial impact of COVID-19 and a summary of second quarter results. Despite a temporary reduction in revenue caused by COVID-19, we've been successful in increasing margins and maintaining our adjusted EBITDA forecast through driving growth in higher-margin business areas and managing costs. The business model and strategy have not changed. Despite the temporary interruption on revenue caused by COVID-19, PAE is delivering on its commitment to expand margins and generate strong free cash flow. Turning to COVID-19, the impact has been felt most notably across three areas of our business.

First, nonlabor revenue or the logistics operations of delivering materials, items such as food, fuel, water, maintenance parts, et cetera. Has slowed considerably due to the reduction in air traffic and airport closures overseas. Second, we've seen moderate reductions in billable labor, primarily due to certain training programs being rescheduled and to a lesser extent, closures of government facilities. The ratio of impacted nonlabor to labor has been approximately 70% nonlabor and 30% labor. About 95% of our direct workforce are working and billable due to the mission essential mission-critical nature of our business.

In the second quarter, the COVID impact totaled $59 million, of which about $41 million was nonlabor and approximately $18 million was labor related. Lastly and the third area of COVID impact is our business plan, including certain assumptions for new business awards, while win rates have remained in the high 30s high 30 range for new business, adjudicated awards have slowed we've not experienced systemic problems, only a temporary slowdown, but these delays have resulted in a portion of our anticipated new business revenue shifting into fiscal year 2021.

Moving on to second quarter results. Revenue of $643 million came in $52 million below the same period last year due to the previously discussed $59 million COVID-19 impact and partially offset by $7 million in on-contract growth and new business programs. We delivered over $48 million of adjusted EBITDA at a 7.5% margin, a 180 basis point improvement over the same period last year. The key drivers for this improvement were the following: first, we experienced increased profitability on many programs in both operating segments; second, the majority of the revenue decline is attributable to nonlabor revenue, which drives a lower profit margin, typically less than 3%; and third, we are managing costs effectively through reductions in selling and general and administrative costs or SG&A expenses.

Our adjusted EBITDA for the second quarter backs out roughly $4.2 million of operating expenses. Approximately $3.5 million is related to equity-based compensation expense, which will be a recurring adjustment and the remaining $700,000 relates to a combination of nonrecurring public company readiness setup costs as well as M&A expenses. Operating income for the quarter was approximately $34 million. Compared with operating income of $26 million in the prior year quarter. The increase was driven by lower SG&A expense, partially offset by lower revenue volume and a reduction in operating income.

Net income for the quarter was $16 million or $0.17 per diluted share compared to net income of about $3 million or $0.13 per diluted share in the prior quarter. The increase in net income resulted primarily from the factors driving the increase in operating income and lower interest expense from reduced debt levels. Next, I will turn to segment results. GMS revenues for the quarter of $508 million decreased $19 million or 3.6% compared to the prior year quarter. The decrease was due to $41 million in COVID-19 impacts, the majority of which [Technical Issues]

Increase in on-contract growth in new business programs. GMS adjusted operating income and margins increased year-over-year due to increased volume on higher-margin programs and revenue mix and partially offset by lower revenue volume. In our NSS segment, revenues for the quarter were approximately $136 million, decreased about $33 million compared to the prior year quarter. The decrease was attributable to $18 million impact in COVID-19, of which $11 million was nonlabor and $7 million was labor. And by a $16 million decrease from 2019 small business set aside recompete losses net of new business wins.

Adjusted operating income improved to $11 million or 8.1% of revenue in the quarter, driven by improved performance on existing contracts and lower SG&A expenses. Turning to cash flow statement. Net income net cash provided by operating activities was about $45 million for the second quarter. DSO was 62 days for the quarter and continues to outperform our historical average. The continued improvement in DSO reflects the focus on process improvements that we have implemented. These improvements will be critical as we grow the business organically. CapEx was approximately $1.2 million, resulting in free cash flow of over $43 million for the quarter.

We ended the quarter in a strong liquidity position with about $139 million in cash and had not drawn on the credit revolver. Furthermore, we lowered net debt to estimated adjusted EBITDA to 2.8 times based on revised 2020 guidance. Now I'll briefly recap our bookings and backlog metrics for the quarter and the year. For the quarter, we generated $522 million in net bookings or 0.8 times revenue for the trailing 12 months. We generated $2.6 billion in net bookings or 1 times revenue. Awards were spread evenly among contract extensions, recompetes and new business. The total backlog at the end of the quarter was $6.3 million, of which $1.2 billion was funded. Backlog and bookings exclude the $1.3 billion contract award on the customs and border protection, which is currently under evaluation.

And as of the end of the second quarter, the total in bids submitted and awaiting award is over $8 billion. In addition, year-to-date, we have submitted about $3.5 billion in bids and plan to submit more than $8.5 billion throughout the remainder of the year. Moving on to 2020 financial guidance. Based on our financial results for the first half of the year, our updated outlook for the remainder of the year, we are revising our fiscal 2020 guidance as follows. For fiscal year 2020, we are reducing the revenue range to $2.6 billion to $2.7 billion.

Based on the revised guidance and first half contract awards, slightly over 96% of our revised revenue guidance at the midpoint is in backlog, less than 2% from recompete contracts and approximately 2% from new business awards. We are narrowing the adjusted EBITDA guidance to be in the range of $172 million to $178 million. And we are now reiterating our free cash flow guidance of $100 million. Relative to our guidance, we reiterated in May, we are now assuming $110 million in full year COVID-19 impacts net of COVID-19 response awards. We are also assuming a $40 million reduction in revenue attributable to COVID-19 related delays in new business net of on contract growth.

For the remainder of the year, we are forecasting revenue to increase sequentially in the third and fourth quarters. Excluding these COVID-19 impacts, we would be generating revenue within our original guidance range, and adjusted EBITDA would have exceeded the high end of the original range. As the forecast relates to the CARES Act, we expect to have little incremental risk exposure. To date, we have largely relied upon customer authorizations to charge for ready personnel. The COVID-19 labor exposure will incur this year was mostly driven by logistics challenges and facility closures, and these are costs not covered by the CARES Act.

Thus, with the agreements in place with many customers and limited current reliance on Section 3610 of the CARES Act, we are confident that we have properly forecasted our COVID-19 exposure for the year. We have narrowed our adjusted EBITDA guidance based on the assumptions that we have experienced a negative impact to adjusted EBITDA from COVID-19. And we are seeing growth in higher-margin areas of our business, just as we've had experienced in accordance with our strategy. We do expect margins to decline in the second half of the year as we ramp up the remaining new business in our plan and generate a moderate increase in nonlabor revenue.

All of which is expected to deliver at least a 60 basis point margin increase for the full year compared to last year's and 40 basis point greater than our original guidance. With regards to cash generation, we are reiterating free cash flow guidance at, at least $100 million. We are continuing to evaluate refinancing opportunities and continuing the dialogue with numerous investment banks. We'll keep the market informed of any significant new developments. Other key assumptions for our 2020 guidance are available in our second quarter earnings presentation on the Investors section of our website.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Brian Gesuale from Raymond James.

Brian Gesuale -- Raymond James -- Analyst

Yeah, good morning guys. Thanks for taking my questions. Just a couple for me. Wondering if you could maybe address what the refi market looks like for some of your debt? And then maybe just talk about how perhaps the M&A markets have opened up and remind us what your preferred uses of cash are?

Charles Peiffer -- Chief Financial Officer

Okay. I'll cover the cash and refi question. And certainly, John could address the M&A markets. So from a refi standpoint, as I stated, we've had discussions with numerous banks, and we do see well, hopefully, we see a path forward. We're excited that the dynamics have changed, and we'll be pushing aggressively to move out. The question will be what makes the most sense for the company, but we are very excited because we have seen a change in the market from a positive perspective. And we have been actively engaged in discussions with numerous banks to assess what our options look like and how do we best proceed to refinance.

As far as cash is concerned, given where we are with refinancing, Brian, the our focus is going to be to get that to see whether or not we can get that behind us and then move out and get that completed. From a cash standpoint, our focus has always been, number one, investing in organic growth; number two, is to lower our leverage ratio by lowering our net debt. And so we're excited that if we can move forward with the refi, we also see an opportunity to lower our cash interest as we move forward. John, do you want to comment on the M&A?

John Heller -- President and Chief Executive Officer

Sure. Exactly, as Charlie outlined, I think we have a very focused strategy on maximizing cash flow generation, investing in organic growth. And then our priority ever since the first day we became a public company has been to look at the possibility to refinance our debt to lower interest expense and put us in a much better position to take advantage of M&A opportunities. So that remains our priority in that order. And we'll see where the refinancing market is. So we're working on that. We have seen, during the COVID period, say, mid-March to the into July, a severe reduction or pullback in M&A activity.

I think sellers were they saw the kind of the risk of going out when the financing markets were not strong and they had to focus on their business just like everyone else to make sure they got through that difficult period. But I think since July, there's been a dramatic shift, and we've seen a large number of opportunities come to market, several of which look very attractive to the PAE strategy. We're definitely involved in examining those. But we are we're going to remain focused on our priority, looking at a refinancing as the next step in our business evolution as a public company.

Brian Gesuale -- Raymond James -- Analyst

Great. And maybe if I could just sneak one more in before jumping back into the queue. You guys have really built a substantial bid pipeline you've got a lot of contracts under award. Can you maybe just give us a sense, and I know things have been a little bit murky with COVID and work at home. But can you maybe give us a sense on how you think the timing lays out for some of those RFPs that are under adjudication? And then maybe just remind us of what the CBP decision time line is.

John Heller -- President and Chief Executive Officer

Sure. As I think both Charlie and I mentioned, we have over $8 billion of bids in Evaluation awaiting award. We have over $1.5 billion in active proposals, meaning RFPs are out, and we're actually writing the proposals to be submitted. So that starts to get us close to about a $10 billion number. We fully expect a substantial portion of that to be awarded in 2020.

We don't have an exact number because, frankly, I can't I can't tell when the government will specifically make an award, but based on information that they have provided to us of award dates, we would expect about at least three quarters of that to be awarded this year, including the customs and border protection bid that was awarded. It is in they are reevaluating to determine the awardee, and we would expect that, that would be awarded this year. Exactly when this year, we're not sure, but we still have a good bit of time left in the year and we think that, that is more than substantial time for them to reach a decision.

Brian Gesuale -- Raymond James -- Analyst

Great, thanks so much.

Operator

Your next question comes from Ashish Sabadra from Deutsche Bank.

John Heller -- President and Chief Executive Officer

Yes. The and we are very excited about the opportunities in NSS around growth, but also in margin expansion. So we're not going to prioritize, say, growth for the sake of growth over the fact that I think there might be slower growth, but much higher-margin potential in the business. But I think the thing that's giving us the most excitement is just the IDIQs in that business. I mentioned several of them, G tax, the global tactical communications services contract that was awarded to PAE in Q1. We are now seeing since that's a brand-new for PAE. It's a very large IDIQ, about $5 billion ceiling.

We are seeing just now the identification of task orders that come out under that contract for 2020 and into 2021. There's a substantial backlog of opportunities that have significant value that we think PAE is well positioned to kind of our fair share of that IDIQ. And we're expecting to see just RFPs under G tax in 2020, but some awards on G tax in 2020, and we have identified specific opportunities, the scope of those opportunities and the requirements that are going to take to award under those.

So I think that the IDIQ capability of NSS is really starting to get us excited about the growth potential, ETSC, the enterprise training services contract was another one. If you recall, that was IDIQ that just started up in 2019. We won a substantial number of task orders that gave us a run rate coming into 2020. Again, there'll be a task order season under ETSC that we have identified a volume of task orders that are set up to come out over the next few months, and we expect some of those to be awarded 2020 with additional task orders that would be put out this year awarded in 2021 so I've covered those two very large IDIQs.

Our construction security business that I mentioned that we have both government and commercial customers underneath that capability, and we're really starting to see that take off from a growth standpoint and pipeline in that area is growing substantially very excited about the potential for that to drive both top and significant bottom line growth. And our focus on NSS is margin expansion, and we really believe that with the volume in those areas I just covered along with many other areas that we have great potential to continue to see NSS lead PAE higher from a margin standpoint.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's very helpful color. And maybe just on the guidance, I understand a lot of the guidance for most of the downtick was predominantly due to COVID. My question there is just as we see a resurgence of the virus in some places. Have you taken into account like any potential risk or further shutdowns or lockdowns going into the back half of the year?

John Heller -- President and Chief Executive Officer

Yes. When we pulled together our update, reflecting the impact of COVID-19. We have taken into consideration the impact through the remainder of the year. And believe we have shown little recovery so that we think we're prudent in the guidance that we've provided that we're providing as far as the revenue range and EBITDA impacts. So we're comfortable with the guidance that we have issued. So we're we see the COVID-19 impact continuing and are not necessarily forecasting any significant change of any consequence.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's really helpful.

Operator

Your next question comes from Josh Sullivan with The Benchmark Company.

Josh Sullivan -- The Benchmark Company -- Analyst

Good morning, John. Charlie, Mark.

John Heller -- President and Chief Executive Officer

Good morning.

Josh Sullivan -- The Benchmark Company -- Analyst

Good morning. Just as a follow-up to the bid activity question. Is there any reason we shouldn't see a September budget flash driving bookings in Q3? Or do you think the election or COVID, is this going to push a lot of this into Q4.

John Heller -- President and Chief Executive Officer

No. Our expectation and just the budget is solid in terms of funding for 2020, where much of the funds will come from as it relates to Q4 government fiscal year spending. And we have a good early look on our IDIQs in terms of identification government specified task orders that will be coming out, and we see it as being pretty stable. And what we're seeing overall, gee, you can hear it in terms of the volume that we have is that RFPs have been robust and have been consistent with our plan and expectations. Awards, as Charlie mentioned, have been slower. But the volume of opportunities have been substantial. We're really busy.

We are as busy as we expected to be in terms of responding to RFPs. We fully expect to see that same type of activity in Q4 that we would see in a normal operating year. And the government's functioning is normally in terms of being responsive to delivering mission and to putting out RFPs, we'd like to see a little bit faster on awards, I'm sure everybody would. But we're very thankful the activity that we're seeing, and we expect that to drive momentum in the second half of the year and certainly into 2021, given the volume that we're seeing.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then you mentioned in the prepared comments, the diversified portfolio is going to benefit in any election outcome here. But can you talk about how PAE is going to retain the gains you guys have made relative to peers, in maybe a flat or downwards defense budget. If you see other players retrench, how do you plan to have PAE retain some of these gains that you guys have made?

John Heller -- President and Chief Executive Officer

I think it's a couple fold. First is just if you look at the areas that we're focused in, which is more in the operations and maintenance and just supporting the day-to-day mission of government where we're not really dependent on new areas of development in government spending, where we would expect that there could be a pullback in innovation and new platform development, which is very costly compared to just kind of maintaining the what the government has today, training the capabilities of the existing government, whether it be in DoD or in Homeland Security, the intel space, and just keeping the support to the U.S. citizen across the country if it's internally more internally focused, which is what our diversification has really created that platform for us.

But I think it's also a story about strategy to expand not just in terms of contracts in our core areas, but what we've done in expanding into new areas around engineering and training forensics, lab support, business process outsourcing, where the government is going to be focused on finding ways to operate more efficiently and contractors play a huge role in helping government do that. Our business process outsourcing focus, we think, is very valuable to the government as they turn to business to help them operate and save money to extend the value of their dollar, they will look to business to help them find ways to operate more efficiently. And I think PAE is well positioned to support that as the government runs into the need to kind of make every dollar go farther over the near future.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then just one last one. You guys called out the Navy as a focus. Can you just expand on what you're seeing there, how you'll be successful, maybe what opportunities are coming up?

John Heller -- President and Chief Executive Officer

Yes. Navy has been a very strong historic customer for us. We are a prime deliverer of support to Naval test and training ranges across the country. We support the Navy and locations as well, such as the Guam naval base. So we just have a very substantial footprint with the Navy. This also extends to aviation support so we just see the opportunity to expand what we're doing there as the Navy being a very strong customer for PAE. And the Navy has an aviation, aviation services IDIQ that they have awarded that we are an award under that we do see substantial pipeline opportunities coming out in 2020, 2021 that can drive expanded growth in that area as well as our continued support in the test and training ranges area.

Operator

Your next question comes from Chris Moore from CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, good morning guys. Most of them have been asked, but maybe just go back to COVID for a second. Obviously, you guys are doing better than most with respect to COVID. But you talked about $110 million kind of net impact. And within that, that $40 million of new business development. I guess my question was that new business development, should I should we view that in isolation, just getting pushed into 2021? Or is it reasonable to assume that has some perhaps modest impact on what 2021 can do?

John Heller -- President and Chief Executive Officer

Sure. I think the by opportunities, sure. I think the our obviously, we're going to take a conservative look as we forecast the business and make sure that we're achieving the goals that we set out for ourselves and project to the public. And there's no doubt that COVID had an impact and it slowed things down within government, just like it did within any business across the U.S. people isolated.

They were trying to stay safe and not going to and it's just as you can imagine, it's one thing to put an RFP out and the work that's required to do that. It's another thing to make an award. There's a significant amount of collaborative work that has to take place by the government. To accomplish that, and there are a lot of compliance requirements to make and we certainly understand that and respect that process.

And we've definitely seen a slowdown. It is it is significant enough to impact us, but it's not we've definitely seen awards being made. We do think that the worst of the impact is behind us. The government is operating, we will come back in the second half of 2020 in terms of awards. But yes, some of that is going to fall into 2021 that we expected to see in 2020, which should help as we look in the future. But we just we can't predict the timing. And government has been consistent in getting RFPs out, I think they will get back to normal in terms of putting out awards on a more consistent basis as time goes on in 2020.

Chris Moore -- CJS Securities -- Analyst

Understood, thanks.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Mark Zindler, PAE, Vice President of Investor Relations.

Mark Zindler -- Vice President of Investor Relations

Well, thanks, everyone. Thanks for joining us this morning and your continued interest in PAE. If you have any questions, please don't hesitate to give me a call, and I hope you have a great day.

John Heller -- President and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.

Duration: 48 minutes

Call participants:

Mark Zindler -- Vice President of Investor Relations

John Heller -- President and Chief Executive Officer

Charles Peiffer -- Chief Financial Officer

Brian Gesuale -- Raymond James -- Analyst

Ashish Sabadra -- Deutsche Bank -- Analyst

Josh Sullivan -- The Benchmark Company -- Analyst

Chris Moore -- CJS Securities -- Analyst

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