Amentum Holdings, Inc. (AMTM) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to Amentum's Third Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to Joe DeNardi, Senior Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. We hope you've had an opportunity to read our earnings release, which we issued yesterday afternoon and is posted on our Investor Relations website. We have also provided presentation slides to facilitate today's call. So let's move to Slide 2. Please note that this morning's discussion will contain forward-looking statements that are subject to important factors that could cause actual results to differ materially from anticipated. I refer you to our SEC filings for a discussion of these factors, including the Risk Factors section of our annual report on Form 10-K. The statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but specifically disclaim any obligation to do so, except as required by applicable law. In addition, we will discuss non-GAAP financial measures, which we believe provide useful information for investors. Both our earnings release and supplemental presentation slides include reconciliations to the most comparable GAAP measures. We do not provide reconciliation of forward-looking non-GAAP financial measures due to the inherent difficulty in forecasting and quantifying certain significant items. These non-GAAP financial measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. Our safe harbor statement included on this slide should be incorporated as part of any transcript of this call. With me today to discuss our business and financial results are John Heller, Chief Executive Officer; and Travis Johnson, Chief Financial Officer. We are also joined by other members of management, including Steve Arnette, Chief Operating Officer. With that, moving to Slide 3, it's my pleasure to turn the call over to our CEO, John Heller.

Thank you, Joe, and thank you, everyone, for joining us today. I'll begin with a discussion of our third quarter results and updated outlook, followed by a review of our business development performance and how we're executing our strategy to create long-term value. I'll then turn to a review of our core growth areas before closing with an update on recent key developments in nuclear energy which provides substantive proof points supporting our strategy and transformational opportunity in this market. Now let's turn to our third quarter performance. Although revenue came in slightly below our expectations, strong operating performance enabled higher-than-anticipated profitability and cash. Notable highlights include revenue of $3.5 billion, reflecting normalized growth of approximately 1%, adjusted EBITDA of $290 million with strong margins of 8.3%, adjusted diluted earnings per share of $0.67, up 20% year-over-year and free cash flow of $135 million. As Travis will discuss in greater detail, we are revising our fiscal year '26 guidance to reflect near-term revenue dynamics and to incorporate our strong year-to-date performance that increases our expectations for adjusted EBITDA and adjusted diluted earnings per share. Turning to Slide 4. In our business development results, we delivered another quarter of solid execution. Net bookings of $3.9 billion resulted in a quarterly book-to-bill of 1.1x and trailing 12 months of 1.3x, an ending backlog of $48 billion. Funded backlog increased 10% year-over-year to $6.2 billion. Our key range indicators remain strong with pending awards of $32 billion, including 2/3 new business to momentum as well as $2 billion of new work already won under protest. We also remain on track to exceed our full year submits target of $35 billion, of which more than half is new business. With that, let me highlight a few notable third quarter awards. Starting in nuclear, we had bookings for multiple commercial customers that totaled over $400 million to provide solutions supporting the initial engineering, development and design of advanced nuclear technologies. Second, we received $250 million in awards across several contracts within our critical digital infrastructure market, including key wins supporting hyperscaler data center build-outs and additional tasking in commercial network infrastructure. Within National Security, we were awarded over $1 billion to provide engineering, logistics and modernization solutions to U.S. and international defense customers. And in Space Systems and Technologies, we booked 2 long-term NASA IDIQ awards, which were previously under protest, including COSMOS which supports flight mission operations and CMOE, where Amentum provides research, engineering and modernization for advanced aeronautics development. Turning to Slide 5. We remain well positioned for long-term growth in our demonstrating clear and tangible progress as indicated by continued business development momentum across the portfolio but particularly in key markets, including global nuclear energy and critical digital infrastructure, while near-term growth is impacting by extended protest periods in certain instances of procurement delays we believe that the underlying drivers of demand, including a well-supported Department of Board budget outlook, clearly point to an eventual strengthening of revenue trends. As we indicated last quarter, we are working with NASA to implement the agency's workforce directive. This initiative looks to insource certain elements of the workforce currently provided by industry with the intention of upgrading scientific and engineering expertise within the agency. Based on conversations with our customers at NASA in recent weeks and months, we now anticipate 3% impact to revenue in fiscal year '27. This is higher than the potential impact we shared on our second quarter call as the scope of in-sourcing is now assumed to be at the upper bound of prior possible scenarios. Given the margin profile of this business, we expect the impact to adjusted EBITDA to be less than that to revenue, and therefore, accretive to overall margins. In the interim, our focus is on mitigating the revenue impact from NASA with strong program execution and continuing to grow the margin accretive areas of our portfolio at a faster rate. This approach and the resiliency of our business model will drive strong earnings and free cash flow growth, which we will deploy in a disciplined manner to further enhance long-term shareholder value. Now let's turn to Slide 6. In prior quarters, I have focused on 3 accelerated growth markets: nuclear energy, digital and space, which combined account for just over $4 billion in annual revenue. Today, I'll cover our core growth areas that are outlined on Slide 7, which represents the remaining $10 billion of revenue. We operate in 3 primary markets with the majority of revenue coming from national security, followed by environmental remediation and homeland security. Across all 3, momentum benefits from deep customer relationships spanning several decades of past performance and credibility, supporting critical customer missions. We see alignment with key drivers of growth across the portfolio, including increased defense spending in the U.S. and among our key allies, securing the border and protecting the homeland and providing solutions to support the U.S. and international customers' management of legacy nuclear projects. Moving to Slide 8. Let me provide an update on the recent strategic progress we've made in nuclear, including key recent developments and program wins. As previously discussed, total nuclear revenue across momentum is $2 billion, of which approximately $0.5 billion is in our Global Nuclear Energy accelerating growth market, where we provide solutions to design, develop and program manage new build nuclear capacity across the globe. Importantly, our rich legacy in the remediation market provides a level of expertise, customer access in a deep talent pool, which enable the success we are having in global nuclear energy. We continue to see momentum as evidenced by a few key recent developments. First, our position as global delivery partner to Rolls-Royce continues to gain momentum as they were selected for small modular reactor deployments in Sweden, and signed contracts to move forward on previously announced awards in the U.K. and Czech Republic. We continue to see a rich pipeline ahead and are proud to support Rolls-Royce in the deployment of nuclear capacity around the world. Second, we announced a strategic partnership with Westinghouse, under which momentum will support engineering and commercial deployment of Westinghouse's APX platform, including its AP1000 gigawatt reactor in AP300 SMR. This expands upon Amentum's existing strategic relationship with Westinghouse from engineering support into a long-term strategic alliance covering wider nuclear technology opportunities. Lastly, Amentum was selected by the Department of Energy to lead development of an AI data center and energy infrastructure project at the Savannah River Site. Under this initiative, Amentum will lead a broad consortium to develop, design, build and operate a multi-gigawatt nuclear facility and AI data centers. While the financial framework is still being negotiated between the consortium and the Department of Energy, we would expect the economics to momentum to be generally consistent with a 2-gigawatt nuclear project with revenue in excess of $1 billion over the life of the project. In addition, given our role as lead integrator, we expect to have options for economic interest in the eventual commercial operations of the facility including the monetization of tokens from the data centers and electrons from the nuclear facility. This opportunity is a clear revenue synergy with our merger and could not have been won without the global reach capabilities and customer access of the combined entity. We are excited about the long-term potential of the program, but also the short-term synergies it contributes to our broader nuclear strategy. As we show on the slide, our expectation for growth in global nuclear reflects a combination of key contracts and partnerships already secured as well as opportunities in our pipeline that we are closely tracking with expected progress in the coming quarters and years. It also reflects the revenue profile typical in this market where projects focused in the first few years is on planning, design and engineering, which yields low tens of millions of dollars in annual revenue before transitioning into construction with annual revenue several multiples higher. While forecasting the exact timing of financial impacts on certain nuclear opportunities is difficult given the long-term nature of these projects, it is clear that Amentum will have a leading position as the U.S. invest to redevelop its nuclear energy capability as a national security priority and to ensure the country's leadership in the deployment of artificial intelligence and critical energy availability. We believe the developments announced in the quarter and those in our pipeline are clear evidence that momentum will play a key role enabling the deployment of nuclear energy capacity in the U.S. and globally. In summary, while we recognize near-term revenue trends are below our prior expectations, our strategic progress and continued business development momentum reinforce our confidence in the long-term trajectory of the business. We remain focused on delivering profitable growth, strong cash flow and continued value creation for our shareholders. With that, I'll now turn the call over to Travis.

Thank you, John, and good morning, everyone. I'll now discuss Amentum's third quarter financial results, which demonstrate continued strong operational performance, improving profitability and solid cash generation. I'll also review our capital structure highlights as well as our updated fiscal year '26 guidance and preliminary expectations for fiscal year '27. With that, let's begin with an overview of our financial performance on Slide 9. As John mentioned, third quarter revenue totaled $3.5 billion and came in slightly below our expectations as a result of the impact from process delays and low-margin material volume. Normalized year-over-year growth of 1% was driven by the ramp-up of new contract awards and on-contract growth, which more than offset the expected continued wind down of certain legacy programs. Adjusted EBITDA increased to $290 million, up 6% from the prior year quarter and reflects record quarterly adjusted EBITDA margins of 8.3%, a 60 basis point year-over-year increase. The strong margin performance was enabled by continued progress on our margin expansion strategy, including a favorable mix shift and strong operational performance. Adjusted diluted earnings per share of $0.67 increased 20% year-over-year, reflecting continued strong operational performance as well as lower interest expense from almost $700 million in debt repayments over the last 12 months and a lower cost of debt enabled by our successful refinancing in April. Moving to our reportable segment results on Slide 10. Digital Solutions delivered revenue of $1.5 billion, representing 3% growth driven by the continued ramp-up of new contract awards in our digital infrastructure and space markets. Adjusted EBITDA increased to $116 million due to the higher revenue volume resulting in adjusted EBITDA margins of 8%, consistent with the prior year and up 80 basis points from the second quarter. Turning to Global Engineering Solutions. Revenue was $2 billion, reflecting impacts from JV transitions a divestiture and the expected ramp down of certain historical programs, all of which were partially offset by contributions from new contract awards and on-contract growth. Adjusted EBITDA of $174 million benefited from 110 basis points year-over-year increase in adjusted EBITDA margin to 8.6%. This strong performance in the quarter was driven by a continued focus on higher-margin growth opportunities, favorable contract mix and disciplined program execution. Now turning to Slide 11 to cover our cash flow and capital structure highlights. Free cash flow in the third quarter and year-to-date totaled $135 million and $213 million, respectively, which is in line with our expectations and reflects strong cash earnings and our disciplined approach to working capital management. This performance enabled debt repayments of $125 million during the quarter and reduced our net leverage to 3x at quarter end, reaching an important milestone we set at Capital Markets Day 1 quarter earlier than expected. We remain on track to achieve net leverage less than 3x in the fourth quarter which positions us well to be more flexible and opportunistic with capital deployment, and our approach will remain focused on allocating capital towards the highest long-term returns. Now turning to Slide 12 and our fiscal year '26 full year outlook. Based on year-to-date performance and our current visibility into the fourth quarter, we are updating our fiscal year '26 guidance. We now expect revenue between $13.8 million and $13.95 billion, which reduced contributions from new business awards under protest and our latest expectation on materials and nonlabor volume. The midpoint reflects normalized revenue growth of approximately 2% in the fourth quarter which is consistent with our performance year-to-date after adjusting for the impact of the government shutdown in Q1. As a result of our strong year-to-date performance, we are raising our outlook for adjusted EBITDA to between $1.115 billion and $1.14 billion, reflecting adjusted EBITDA margins of 8.1% at the midpoint, a 20 basis point improvement from our prior guidance and a 40 basis point increase from fiscal year '25 actuals. We are also increasing guidance for adjusted diluted earnings per share to a range of $2.40 to $2.50, given the strong year-to-date operational performance and interest expense benefits from our debt refinancing. And finally, we are maintaining our free cash flow guidance between $525 million and $575 million. As a reminder, fourth quarter cash flow will benefit from seasonally strong collections and 1 fewer pay cycle relative to the prior year quarter. Looking ahead, let's turn to Slide 13 to discuss our preliminary views for fiscal year '27. From a revenue perspective, as John indicated, we now expect a 3% impact from NASA's workforce directive. In addition, consistent with our commitment to allocate resources to higher return opportunities, we have made an intentional decision to exit a few node to low-margin programs, notably in domestic-based operations that totaled approximately 1% of revenue. At the same time, given our continuing business development momentum, we expect mid-single-digit growth in the remaining portfolio. more than offsetting the impacts from NASA and the exit of low-margin work. Looking at adjusted EBITDA. Given the relative profile of our NASA portfolio, we expect the impact will be accretive to overall margins. After taking into consideration some investments we are making to drive long-term growth, particularly in nuclear and digital infrastructure as well as a favorable mix shift and other operational improvements, we expect a 20 basis point year-over-year increase in margins. Given our strong execution to date and further benefits of mix, its higher-margin areas of our portfolio continue to grow faster, I'm confident in our ability to drive sustained margin improvement in the years ahead. Finally, we expect continued strong earnings per share and free cash flow growth as a result of the increased profitability and reductions to both integration and interest expense. In closing, our focus as a management team remains on execution, prudent investments to support long-term growth in our strongest markets and deploying capital to maximize long-term return on investment. We have conviction that our ability to deliver on these areas of focus will translate over time into significant value for our shareholders. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Tobey Sommer with Truist.

I wanted to start out, if I could, looking forward as your commitment to delever to a reasonable range that comes to a conclusion. How are you planning to deploy your capital as you look into the following fiscal year?

Tobey, Travis here. Well, thanks for your question. Obviously, we're pleased with the progress we've been able to make to date as it relates to our deleveraging objectives. The cash flow performance in the quarter allowed us to get to net leverage of 3x at the end of the quarter, which, as you know, is 1 quarter earlier than we expected when we set that goal back at Capital Markets Day. So really pleased with the progress. As you can imagine, we've been preparing in recent months to be ready as our capital opportunities broaden for deployment. And that obviously includes working internally and with our Board on the various strategic options, including M&A, share repurchases and continued debt reduction. So in terms of how we deploy the capital, as stated in our prepared remarks, it should and will be determined based on what presents the best long-term return for [indiscernible] and our shareholders. So that obviously requires we'd be realistic and disciplined about both immense [ risk ] and opportunities, but also about those as the companies we would look to potentially acquire from an M&A perspective. And I think it also should require that we take a responsive look at where stock price and valuation are and taking a look at things like intrinsic value and making sure that we're obviously taking that into consideration as we make those decisions. So as appropriate and as we move throughout the year, we'll continue to keep you guys updated. But just keep in mind, our approach will focus on maximizing free cash flow per share and driving long-term shareholder value.

And what I would add to that, Tobey, it's John. Thanks for the call. We're making great progress in -- across our portfolio from a business development standpoint, the numbers we talked about today, the volume of bids, our success in nuclear energy and the partnerships we're getting all organic. So I think what we're showing is the enterprise of momentum has the ability to go to market in our core growth areas today with the organic investments we're making and does not require transformational M&A. That doesn't say that M&A couldn't be part of our strategy, but I think the point would be that we're very comfortable with the capabilities we have to compete and win in areas that can drive higher margin and growth.

And I was wondering if you could -- it might be early, I know, but you gave a preliminary look at fiscal -- the next fiscal year. Do you think -- do you expect top line organic growth in the fiscal year after that? And I know it's far away, so not an official guide or anything like that complete, but any kind of color you could provide would be helpful.

Yes. So [indiscernible] can appreciate. A fair bit has changed over the last 24 months, especially as it relates to dynamics that are impacting our near-term revenue situation, obviously, as we covered in the prepared remarks, NASA headed into next year, which as you would expect, we hadn't originally contemplated. But at the same time, our performance this year, I think, demonstrates our ability to mitigate the impact of lower revenue on both EBITDA and free cash flow and the preliminary outlook we provided for '27 has that trend continuing. And then directly at your question, looking ahead, as John really highlighted in his prepared remarks and obviously in response to your prior question, we're really pleased with the business development momentum and we continue to see attractive opportunities across the portfolio with particular momentum in nuclear energy and critical digital infrastructure. And at the same time, we're also making progress across our technology-enabled businesses where our differentiated capabilities across engineering, digital, space, national security. We see really aligning well with emerging customer priorities and long-term investment. So altogether, when you look at the portfolio next year, aside from the impact we're seeing from NASA, it's growing at that mid-single-digit rate. And we're really excited about the trajectory and what that means for momentum in the medium and long term.

And we're really just keeping our heads down on our strategy, and it's working. The combination of business development momentum, we're seeing margin expansion. We're generating very strong free cash flow. If you look at LTM book-to-bill, 1.3, this past quarter, 1.1 book-to-bill. We said we're going to bid over $35 billion this year. We've already done that, which means even with several months to go in the year, we've already exceeded what we did last year. So the things that are happening in the strategy and the tactical execution of the team is working, and we feel very comfortable on how we're managing the business and where it's going to go from here.

Your next question comes from the line of Seth Seifman with JPMorgan.

This is [ Rocco ] on for Seth. Kind of building on the second question there. Looking at the preliminary color on 2027, how should we think about the split between DS and GES? GES has seen some not great growth in '26 so far, while DS is supposed strong growth even with the Rapid Solutions Divestiture. Should we be expecting that trend to continue next year?

Yes. Obviously, it's a little bit early to get into any segment specific guidance. But what I would say at a macro level is from an underlying perspective, obviously, NASA, which is in our digital solutions, segment will put some pressure on the growth in that segment. But setting that aside, we do see organic growth opportunities across both segments for next year as well as EBITDA margin expansion opportunities across both segments.

Great. And then how should we be thinking about momentum's involvement in U.S. allied nuclear power programs? For example, the reported agreement with Saudi Arabia. Would this be an opportunity for momentum? And are there any other kind of big international opportunities to call out here?

Well, we have a strong pipeline of opportunities that we're working globally. We certainly see opportunities in countries like Saudi Arabia is open to momentum with our brand, global brand. We definitely get inbounds and understand where growth is going to happen in the near term and we are very active. Obviously, we've been involved in 17 nuclear power plant construction projects in the U.K. We have a great brand in Europe working in various countries across Europe now with our Rolls-Royce partnership. So we're very well established in the European continent and the nuclear energy space, and we would see and our tracking opportunities globally in our pipeline that could provide opportunities for growth in the near term.

Your next question comes from the line of Colin Canfield with Cantor Fitzgerald.

For '27 growth outlook or preliminary growth outlook, can you just talk about how much of that revenue outlook is covered by both your backlog today as well as your expected pending awards, over, call it, the next 6 to 12 months? And then if -- I know you didn't want to go into segment detail, but maybe talk about much level of on-contract growth that you're assuming as part of that number.

So this is a few months earlier, obviously, than we provide outlooks in the prior years. But what I would say from how we see the year shaping up from a sources of revenue perspective. As we sit here today, we expect approximately 92% of the revenue in FY '27 to come from existing or follow-on work. So that's a really good place to be in terms of a level of visibility this early, right? FY '26 isn't over yet, right? So we still got a few months to go in terms of the $32 billion of pending awards that John mentioned and seeing how those get adjudicated in the coming months will obviously have an impact on FY '27, but feel really good about the visibility we have as we sit here today, and we'll continue to keep you updated as we move throughout the year.

Yes, I just call out that we did mention that there have been factors that have impacted the revenue, like the firm fixed price executive order. That has created kind of slowdown reconsideration of some new business. So we've seen some new business delays, award delays because of that, which we deem is very positive. The opportunity to do more fixed-price work, and we are seeing that shift happen in real time. So that's -- but it slows the process down. And then of course, we've had a significant number of protests on new business, new new business, that new business. So those couple of things will work their way out over the next year that the executive order for a firm fixed price has to be implemented by the government by the middle -- this time next year. So we still have some time for that to continue to play out. But overall, I think it will be real positive for the profitability of the business.

Got it. Got it. And then maybe if we could talk about portfolio shaping. Travis, if you maybe characterize kind of where you're at in terms of selling additional pieces and delivering faster and how you think about kind of the sizing of those pieces?

I think there's an inherent portfolio shaping going on and what's happening organically in the business right now. I mean some of our current contracts are seeing increments or sub elements of the contract effort shift, as John mentioned, the higher margins, some fixed price type of elements and a lot of that's coming through some of the IDIQ mechanisms on our existing contracts. I would say, even if you look at the trends in our current business development activities, really across the portfolio, we've begun to see an incremental shift towards OTAs, other transactional authorities and commercial service offering type procurements and our team is been very responsive to that. So I think even without some kind of inorganic type activity, organically, that shift is happening. And as John mentioned, it's coming through in the contract mix as we see more and more of the portfolio migrate towards fixed price. So there is kind of the steady trend of organic portfolio optimization happening.

Yes. And I think Travis mentioned this, a lot's changed in the last 24 months. And you think of FY '25, that was a year of integration. Our business development pipeline was pretty much already set before the merger. But we've had now almost 2 years to really work with the combined enterprise that the new momentum represents, which has opened the doors to a lot of other technology-enabled opportunities that have allowed us to shift our focus in our pipeline from lower margin, say, managed services type work to technology-enabled work, and we're prioritizing that and starting to -- it's going to take time. We see a little bit of that this year. But as we think about '27 and '28, and we'll see that shift to more fixed price, more T&M less cost plus, more technology-enabled solutions, all driving towards higher margins. In some cases, fewer product buys, which are just part of the contracts we do which does impact kind of revenue in the short term, but I think in the long term, we're excited about where that growth will come from.

Your next question comes from the line of Gavin Parsons with UBS.

I just wanted to dig into the backlog kind of visibility to revenue conversion, right, nice growth in funded, nice growth in total. And how do I reconcile that with the 0% to 1% growth next year? I mean is that NASA that just needs to come out and otherwise kind of 10% funded backlog growth gives you pretty good visibility to mid-single digits? Or how do I think about backlog converting to revenue?