V2X Inc (VVX) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Vectrus Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd like to turn the conference over to your host, Mr. Michael Smith, Director of Investor Relations and Corporate Development. Thank you. You may begin.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Fourth Quarter and Full Year 2016 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on our Investor Relations website, investors.vectrus.com.

Please turn to Slide 2. During today's presentation, management will be making forward-looking statements pursuant to the safe harbor provisions of the federal securities laws. Please review our safe harbor statements in our press release and presentation materials for a description of some of the factors that may cause actual results to differ materially from the results contemplated by these forward-looking statements. We assume no obligation to update our forward-looking statements.

Also, we will be making reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. You can find the non-GAAP reconciliations and other disclosures in our earnings release and in our presentation slides, which are publicly available on the Vectrus website at investors.vectrus.com.

At this time, I would like to turn the call over to Chuck Prow.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us on the call. Please turn to Slide 3. Before we get started, I'd like to say that I'm excited and privileged to have joined Vectrus at this pivotal time. Since joining the company in December, I have visited several of our overseas and U.S. programs to meet with clients and employees. The feedback I received from clients regarding the contributions of our employees was outstanding. Vectrus employees work side by side with clients, oftentimes in challenging environments, supporting some of the most important missions around the world. Our employees' commitment and dedication to our clients' successes is second to none and is one of the reasons Vectrus is a trusted partner.

Overall, I believe there is significant opportunity to build on Vectrus' global footprint, capabilities, market positioning and client relationships to create a higher-value platform.

Now I would like to discuss our full year 2016 financial results and highlights. I am happy to report that 2016 revenue, operating margin and earnings per share were all in line with our full year guidance while net cash provided by operating activities exceeded our guidance. Revenue for the full year at $1.19 billion, up $10 million year-over-year or up 1%. Operating margin was 3.6% and was still in line with guidance despite some nonrecurring onetime items in the fourth quarter. Diluted earnings per share were $2.16.

In 2016, net cash provided by operating activities was strong at $37 million, exceeding our $30 million to $34 million estimate. Debt payments equaled $29 million for the year, with $15 million being voluntary. Our total debt was $85 million at year-end, representing a leverage ratio of 1.63x.

During 2016, we were awarded and have since successfully phased in a $21 million installation services task order in support of U.S. Air Force at Al Udeid Air Base in Qatar. The task order was awarded under our Air Force contract augmentation program indefinite-delivery/indefinite-quantity, or IDIQ contract, also known as AFCAP, which provides full-spectrum logistics and base operations support.

Furthermore, and more recently, in 2017, we announced that we were awarded another AFCAP task order in the amount of $14 million to provide installation services at Bagram Air Field in Afghanistan. We look forward to continuing to compete for task orders under AFCAP and supporting our client contingency missions. As a reminder, the AFCAP contract was awarded in June of 2015 and has an estimated completion date of September 2021.

Additionally, during 2016, we were awarded a position on the U.S. Navy's Global Contingency Services Multiple Award Contract II, known as GCS MAC II, which has an 8-year duration. Work around GCS MAC II will include short-notice facility support services and incidental construction in support of natural disasters, military efforts and humanitarian support for the Defense Department and other customers around the world.

Importantly, in addition to AFCAP, the GCS MAC II contract represents our second long-term IDIQ win in support of global contingency efforts. While opportunities associated with GCS MAC II are difficult to forecast, given its contingency-based nature, we are pleased to be part of the effort and look forward to providing the Navy our differentiated and robust solutions.

In 2016, Vectrus was awarded the Enterprise Legacy Voice and Information Systems contract, or ELVIS, which is an IT contract we have supported for almost 20 years. While ELVIS represents a small percentage of total revenue, it is an important strategic contract that provides integrated and reliable command and control, intelligence and deployable communications support to manned and unmanned Air Force sites in Belgium, Germany, the United Kingdom and Turkey.

Please turn to Slide 4. Historically, we have discussed our 3 large re-compete programs, and I would like to provide an update on the current status of each. Regarding the re-compete of our Kuwait-based operations and security support services contract known as K-BOSSS 2.0, on November 7, 2016, we were notified by the Army that it was taking corrective action to resolve protests associated with the initial award. As part of its corrective action, the Army amended the solicitation and requested revised proposal from only the existing offer. Vectrus is encouraged by this corrective action. We look forward to delivering a robust and differentiated solution while continuing the excellent performance our client has consistently received on this contract.

We do not know when the Army will issue an award decision, but as of right now, Vectrus is on contract until March 28, 2017. Given the current status of the re-compete, the history of solicitation and phase-in period, it is reasonable to assume that our current contract could extend for some period of time. At this time, it is our best estimate that the existing K-BOSSS contract will extend well into the third quarter, although not a guarantee. In 2016, the K-BOSSS program contributed approximately $438 million or 37% of revenue.

Turning to the consolidated Army Pre-Positioned Stocks-5, or APS-5, contract, which includes our current APS-5 Kuwait and APS-5 Qatar contracts, in the third quarter of 2016, we were notified that we were not selected for the consolidated contract and subsequently filed a protest with the Government Accountability Office, or GAO. On December 21, 2016, the GAO issued its decision denying our protest of the APS-5 contract award. We are currently proceeding with the program phaseout while ensuring our client continues to receive exceptional support from Vectrus through this transition period.

I had the opportunity to see this program firsthand while in the Middle East, and our folks continue to execute the mission and provide excellent performance and service to our clients. As a matter of fact, our last performance rating issued from the Army was the highest it's ever been. I would like to thank the government for their recognition of our performance and our employees for their amazing efforts on this program. In 2016, the APS-5 Kuwait contract contributed approximately $181 million or 15% of revenue. Our contract for APS-5 extends through March 2017.

Regarding our Maxwell Base Operations Support program, during the fourth quarter, Vectrus was awarded a modification to the existing contract that extends its performance period into May. We expect the Air Force to award this re-compete contract in the second quarter of 2017.

Turning to the Thule Base Maintenance Contract. As you may recall, the Air Force awarded a $411 million, 7-year contract to a Danish subsidiary of Vectrus in October of 2014. After a lengthy protest and litigation period, on December 14, 2016, the Air Force directed our Danish subsidiary to begin the transition of the Thule contract. Our Danish subsidiary has begun the phase-in period, with full contract operations to begin 1 October 2017.

Most recently, on January 31, 2017, the Court of Federal Claims granted one protester its motion for a reconsideration to address 2 claims that were not expressly ruled upon in the court's dismissal of the case in October 2016. At this time, this matter remains pending before the Court of Federal Claims. However, Vectrus is moving forward, as directed by our clients, and we look forward to executing this program with the Air Force in the coming years. We added the Thule contract to our backlog in the fourth quarter and anticipate revenue streams to materialize in the later part of 2017.

I'd like to update you on the status of new business, which will be a primary focus for me at Vectrus. We have approximately $1.5 billion in bids submitted pending award, all of which are for new work. Additionally, we plan to submit proposals on almost $6 billion of identified opportunities over the next 12 months, all of which are for new business.

I believe there are several opportunities to strengthen our pipeline while improving the overall probability of win. The Vectrus team has done a phenomenal job of managing the business through a challenging 2016. Our team's focus on cash collections and methodical approach to capital allocation resulted in a favorable financial position from a liquidity and leverage perspective.

It is worth noting that the company has paid down 39% of its total debt since September of 2014. We ended 2016 with a total debt of $85 million and $48 million of cash on the balance sheet. At 1.63x debt-to-EBITDA, we are well below our 2016 covenant level of 3.25x. We will continue to prudently manage our leverage profile and capital structure.

As you may know, Vectrus Improvement Projects, or VIPs, are a key component of our operational excellence initiatives. VIPs are lean-based approaches, which are a key component of how we increase stakeholder value and differentiate our business. In 2016, we had over 50 VIP submissions, and I'd like to thank all of our employees for their outstanding efforts in demonstrating how Vectrus can improve process, increase efficiencies and reduce cost. Your efforts are helping to differentiate Vectrus in the marketplace while improving our overall value proposition.

Please turn to Slide 5. I have initiated a strategic process that will leverage our core facilities and logistic capabilities with our technology business. The federal facilities and logistics markets are undergoing significant pressure to transform and to deliver much better outcomes at dramatically lower cost. Vectrus has an opportunity with our clients to be a leader in this transformation through innovation. The convergence of our clients' physical and digital infrastructure and supply chains represent an opportunity to improve the outcomes of our clients' missions while creating a higher-value, growth-oriented platform. We are evolving our long-term strategy in order to take advantage of this opportunity and to shape our future.

Our strategy will chart the path to establish Vectrus as an innovator and leader as our clients seek new approaches and solutions as the physical and digital aspects of their facility and logistics missions converge. Our 3 core strategies, enhance the foundation, expand the portfolio and add more value, will evolve to include more innovative technology-enabled methods, capabilities and business models. Each of our core strategies will have a series of strategic imperatives, which will be rolled out at the appropriate time.

First, the core strategy, enhance the foundation, will execute a series of imperatives focused on strengthening our methods and approaches and by growing in and around our base. We will expand our VIP projects to an enterprise-wide program, and we will infuse new technologies and operational capabilities into our current operations and programs wherever possible. This will result in the delivery of a higher-value, high-impact services to our clients while growing in and around our base.

Second, the core strategy of expand the portfolio will introduce a series of strategic imperatives designed to, a, infuse technology into our current facilities and logistics business; and b, enhance the full life cycle aspect of our current IT business. The outcome will be improved performance on current programs while creating differentiation in our new business activities. We will leverage our strong foundation at facilities and logistics and IT to package our existing capabilities and, in other cases, partner with highly innovative third parties. The net result will be a more technology-enabled, differentiated and higher-value portfolio.

The final core strategy, add more value. While we are in the very early stages of this journey, the essence of these imperatives will be to, with our clients, create more predictive, agile and responsive infrastructures and supply chains; and, in turn, create a higher-value, significantly differentiated, growth-oriented business. In short, the add-more-value imperatives may include introducing new higher-value service offerings, strengthening our business model and more aggressively and systematically integrating our enterprise operations. As you can see, we are repositioning ourselves, which is going to be an exciting journey, and I look forward to updating you on our progress.

Now I'd like to turn the call over to Matt, and he will go through our financial results and provide 2017 guidance. Then we will open up the call for questions.

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 6. Today, I will be discussing our financial results for the 3 months and year ended December 31, 2016. In the fourth quarter, revenue was $288 million, down $23 million or 7.4% compared to the same period of 2015. The decrease was due to lower revenue of $28 million from Afghanistan programs and $18 million from U.S. and European programs, partially offset by a $23 million increase in Middle East programs. Operating income was $8.6 million or 3% operating margin in the fourth quarter of 2016 compared to $11.3 million or 3.6% operating margin in the fourth quarter of 2015. The $2.7 million or 24% decrease is impacted by the year-over-year decrease in revenue and $1.5 million in additional onetime costs associated with the CEO transition. Interest expense decreased $700,000 for the 3 months ended December 31, 2016, when compared to the same period in 2015 due to a lower long-term debt balance.

The tax rate increased in the fourth quarter of 2016 to 39.7% from 36.4% in the fourth quarter of 2015, and the tax expense decreased in the fourth quarter related to the revenue and operating income declines previously discussed.

Diluted earnings per share for the fourth quarter were $0.40 compared to diluted earnings per share of $0.55 in the fourth quarter of 2015. This is primarily driven by the year-over-year decrease in revenue, higher selling and general administrative, or SG&A, expenses, and offset partially by the lower interest and tax expense in the period.

Also on Slide 6 are the comparisons of the year ended December 31, 2016 and 2015 financial results. The year-to-date financial results for 2015 reflect the generally accepted accounting principles financial results but also reflect the adjusted financial results to operating income, operating margin and diluted earnings per share, which exclude separation costs required to become a stand-alone public company, and onetime favorable settlements of tax liabilities. There were no adjustments to the 2016 financial results.

In the discussion today, for comparison purposes, I will compare the 2016 financial results for our operating income, operating margin and diluted earnings per share to the 2015 adjusted financial results. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP.

Full year 2016 revenue was $1.191 billion, an increase of $10 million and up 1% when compared to 2015. The increase was driven by the growth of our Middle East programs of $131 million, partially offset by the decline in revenue from our Afghanistan programs of $80 million and U.S. and European programs of $41 million.

Operating income was $42.8 million or 3.6% operating margin for the full year of 2016, which is $600,000 or 100 basis points unfavorable when compared to the adjusted operating margin in 2015. This decrease is due to increased SG&A expenses, primarily due to the CEO transition in the fourth quarter of 2016, which is partially offset by income associated with the increase in revenue when compared to 2015. Full year 2016 diluted earnings per share were $2.16 compared to adjusted diluted earnings per share of $2.23 in 2015. The decrease in EPS is primarily due to the impact of CEO transition expenses, an increase in the number of diluted shares outstanding, partially offset by the income associated with increased revenue and lower interest expense in 2016.

Net cash provided by operating activities was $36.6 million for the year ended December 31, 2016, which was an improvement of $17.7 million versus 2015. We closed out the year with 57 days sales outstanding, which is a year-over-year improvement of 11 days. This improvement is due to the phenomenal job by our teams in managing cash collections in 2016. We are now looking to sustain this level of DSO going forward.

Please turn to Slide 7. As you can see by the graph, since the third quarter of 2014, we have reduced our total debt by $55 million or 39%. Importantly, over this time, $27 million of our debt payments were voluntary. The company ended 2016 with a total debt of $85 million, which was down $29 million compared to the prior year, representing a total debt-to-trailing 12 months consolidated EBITDA leverage ratio of 1.63x. The total debt of trailing 12-month consolidated EBITDA leverage ratio covenant level for 2016 was 3.25x, which drops to 3x in 2017 and 2.75x in 2018. We will continue to methodically manage our leverage profile and capital structure as we move through 2017.

Please turn to Slide 8. For the fourth quarter, total backlog was $2.4 billion and funded backlog was $665 million.

Please turn to Slide 9. I would like to highlight a few program assumptions that will provide insight into the 2017 revenue guidance. Although we are currently on the K-BOSSS contract through March 28, 2017, it seems more likely, but not a guarantee, that the contract will extend beyond March, and we have estimated in our guidance it will contribute well into the third quarter. The length of any potential extension is predicated on when the re-compete contract is awarded.

In addition, we are currently on APS-5 Kuwait and Qatar contracts through March of this year. With K-BOSSS and APS-5 included in our 2017 guidance, we are estimating revenue to range from $910 million to $1.01 billion with a midpoint of $960 million. The 2017 revenue midpoint is $231 million lower when compared to 2016, due primarily to the impact of the APS-5 and K-BOSSS contracts previously discussed. Due to the material nature of these contracts, changes to the period of performance included in the 2017 guidance assumptions could have a material impact to the overall guidance. Thule is expected to begin full performance in the fourth quarter of 2017.

The guidance for our operating margin will range from 3.4% to 3.6%. As a result, the midpoint for our operating margin is 3.5%.

We have made great strides in 2016 in improving operating income performance on our existing programs, driving a net favorable cumulative catch-up in 2016 of $7.5 million. There are many factors that drive this performance, including successful contract modifications and extensions of current contracts. Adjustments can be positive or negative and are a normal part of this business, and our guidance contemplates this reality. Additionally, commensurate with the launch of our new strategy, we may incur some costs associated with the implementation of our strategic imperatives, which may impact margins in 2017. Looking forward, we believe we will create a higher sustained margin profile with the successful implementation of these imperatives.

We are estimating diluted earnings per share to range from $1.53 to $1.83. The midpoint of diluted earnings per share is $1.68. This assumes an estimated 11.1 million weighted average diluted shares outstanding. We estimate net cash provided by operating activities to range from $20 million to $26 million with a midpoint of $23 million. Full year net cash provided by operating activities is expected to be slightly above 100% net income conversion.

2017 capital expenditures are expected to be approximately $1 million. Depreciation and amortization is expected to be $2.3 million for 2017. 2017 mandatory debt payments are $15.8 million. Interest expense is forecasted at $4.2 million, and we currently estimate a 36.4% tax rate for the full year.

Now I'd like to turn the call over for questions.

(Operator Instructions) Our first question comes from Brian Ruttenbur from Drexel Hamilton.

Yes, a couple of quick housekeeping. D&A, you just stated, in 2017 was what? I didn't catch it.

2017 is $2.3 million. CapEx is about $1 million.

Okay. All right. And '16, how much was CapEx and D&A?

CapEx was a little low -- less than $1 million and D&A is very close to what we reported in '17, very similar.

Okay. Perfect. And then what are the big re-bids besides K-BOSSS obviously coming up? What else is out there?

So we talked about for a couple of years, really, now, APS-5, K-BOSSS, and Maxwell. K-BOSSS is still in play. Maxwell is also expected to decide, really, in the next month or so unless something changes. So we'll get those resolved. And as a reminder, we've been tracking APS and K-BOSSS, and they were a material part of our business, over 40% to 50% of our overall revenue streams. As we go forward, we expect the re-compete ratio to come down to a more normalized number, no more than 20% of our overall revenue streams as you look forward into 2018 and beyond. That [indiscernible].

Okay. So the Maxwell rebid -- I'm sorry, I interrupted. I apologize, Matt. Maxwell re-competes win? When do you find out? Or what have you -- and more importantly, what have you got in the estimates?

So we expect to hear in the next couple of months, to be honest. The government published a begin date, if you will, of mid-May. So we could hear it anytime on Maxwell. It doesn't mean it'll play out that way, but we believe that procurement's far enough along that we'll hear pretty soon. Sometime this year, for sure. With our -- we've...

But in your guidance, you have Maxwell through Q2 or do you have Maxwell continuing?

Through our guidance, we have Maxwell through our period of performance, which is really May right now. And our guidance contemplates various assumptions, on extensions, re-compete wins and pipeline success. And we've got that all baked into what we've guided to in 2017. The big variable that we've tried to communicate is really the K-BOSSS situation. If K-BOSSS awards relatively quickly and there's a change, that could change our guidance. If it continues to extend beyond what we think it's going to be at this point, which is really the third quarter of this year, that could also push us to the upper end of our '17 range.

Okay. And then, just a couple other -- you mentioned restructuring, Chuck. It sounded like restructuring where you're going to infuse technology in the current business. Can you just talk about that? How is that going to help you on the K-BOSSS re-bid?

Sure. We did not use the word restructuring. That's not the intent. We have initiated a series of strategic initiatives that will, as you say, allow us to infuse technologies not only into our current programs but into the $6 billion of pipeline that we have in play. With regard to K-BOSSS specifically, it's a bit late for that in terms of any new business activity. But again, very aggressively, we're working with all of our existing programs to infuse technology and new operating approaches wherever we can.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to Mr. Prow for any closing comments.

Thank you very much, and thank you for joining us on the call today. Once again, I'd like to reiterate, it's an honor to be leading Vectrus during this pivotal time, and I look forward to talking to you about our progress in future periods. Thanks a lot again.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.