V2X Inc (VVX) 2020 Q2 法說會逐字稿

Thank you for joining us for the Vectrus Second Quarter 2020 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Robert, and I'll be the operator for today's call. (Operator Instructions)

And now I'll pass the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus. Thank you. You may begin.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Second Quarter 2020 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, 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 statement 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. The company assumes no obligation to update its forward-looking statements.

Additionally, I would like to point out that we will be discussing and reporting adjusted non-GAAP metrics, including adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials, press release and Form 10-Q.

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

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today.

We reported a solid quarter as it relates to revenue, new business and cash flow. EBITDA and earnings were adversely impacted by factors that I'll explain shortly. However, Vectrus remains stronger than ever and is expected to achieve meaningful EPS growth in the second half of the year despite the backdrop of COVID-19.

Please turn to Slide 3 to discuss our financial results. Revenue in the second quarter increased slightly from last year. We estimate that COVID-19 impacted revenue by $22 million that we expect to be deferred into future periods due to host nation and base access restrictions across the contract portfolio. Operating cash flow in the quarter was up over 50% from last year, yielding nearly 0 net debt today and our strong cash flow profile are the characteristic of our resilient business and client base.

While our revenue and operating cash flow performances were solid in the quarter, our adjusted margins and EPS were affected by a contract adjustment to a European program, onetime closeouts and COVID-19 impacts. I will discuss the contract and contract closeout adjustments in greater detail in a moment.

Our adjusted EBITDA margin in the second quarter was 2%. The previously mentioned adjustments adversely impacted margins by 240 basis points. Regarding COVID-19, the deferral of higher-margin revenue had a disproportionate 30 basis point impact on margin. Adjusted EPS of $0.24 was adversely impacted by $0.54 due to the previously mentioned adjustments. In addition, we estimate that COVID-19 had a $0.14 impact on adjusted EPS. Our GAAP EPS was also affected by M&A costs and LOGCAP V pre-operational legal cost of $0.14.

While these challenges affected the quarter's profitability, our growth engine continued to execute well, and we were successful in winning significant new business in the quarter. Specifically, our Navy growth campaign went over $550 million in new programs. We also expect additional wins from our approximately $1.1 billion in bids submitted and pending potential award. Our backlog grew 18% year-over-year to $3.8 billion at the end of the second quarter. With respect to LOGCAP V, transition and start-up activities are proceeding, but at a slower pace because of COVID-19-related base access and host nation restrictions.

The original LOGCAP V transition time line called for 180-day phase-in period, which is being extended as a result of the global pandemic. At this point, we do not anticipate full operational capability on LOGCAP V until 2021. With that being the case, we remain actively engaged with our client and are already seeing additional task orders for work associated with this program. Also, while LOGCAP has historically been an Army-centric contract, we are seeing demand from additional clients to utilize the program to support their critical mission requirements.

In late July, subsequent to the second quarter, we were awarded a $529 million modification to K-BOSSS program that extends the contract from September 2020 through September 2021 to support the transition into our LOGCAP V CENTCOM task order. Our priorities for the second half of the year include continued seamless LOGCAP V transition, ensuring program execution and delivery while keeping our teams and our clients safe during COVID-19, expanding our pipeline of opportunities and continuing to pursue strategic M&A.

Our revised full year numbers reflect first half results, the incremental impacts from COVID-19 on existing programs, including this impact on transition of LOGCAP V and newly won programs. Both host nation and base access continue to be a gating factor to full operational capability. We estimate COVID-19 will impact revenue and EPS by $40 million and $0.13 in the second half. Additionally, protests on new business awards are limiting our ability to conduct transition and phase-in activities.

Susan will address the guidance in greater detail. But importantly, we expect the second half of 2020 results to be more representative of normal core growth and profitability.

Now I will go through the factor that impacted our 2Q results and full year guidance. Please turn to Slide 4. In the second quarter, we realized a contract adjustment to a European program, which had a $0.36 adverse impact on EPS. For a number of reasons, both volume and cost, the outcome-based contract is in a loss position. The company is working with the client to resolve this issue prior to the next option period in mid-2021. Importantly, the rest of our portfolio continues to operate and perform well and remains on track with plan.

During the second quarter, earnings were also impacted by $0.18 due to onetime adjustments associated with contract closeouts, contract adjustments and government fiscal year close outs. Vectrus has been aggressively investing in expanding the pace of its internal investments in order to further enhance our talent, processes and systems to support future growth. These investments support the execution of our enterprise-wide performance improvement initiative, Enterprise Vectrus, which are streamlining, modernizing and automating our core program and support processes. Part of this effort includes the implementation of our modernized enterprise IT platform, several aspects of which are operational and is scheduled to be completed in the first half of 2021.

Please turn to Slide 5 to touch on our notable contract wins. We continue to make investments in growth-focused talent and capabilities that support differentiation and our yielding growth. Through the second quarter, Vectrus has received $1.7 billion in awards by delivering exceptional program performance to our clients and adhering to our growth strategy of conducting targeted campaigns designed to communicate the value we deliver.

Specifically, with the Navy, Vectrus was awarded an 8-year, $210 million, firm-fixed-price contract to provide base operations support to Isa Air Base in Bahrain. Also, as we discussed last quarter, our new joint venture was awarded an 8-year, $190 million contract to provide base operation support services at Naval Station Patuxent River. And finally, the same joint venture was awarded a 7-year, $154 million, firm-fixed-price contract to support the U.S. Naval Academy.

It is important to note that all of these awards are currently under protest. Given the protest, we now expect that these wins will not material -- will not be material to 2020 results and will primarily begin contributing in 2021. Additionally, we were awarded a strategically important 5-year, fixed-price IDIQ to provide intrusion detection system, supplies, hardware and services at Edwards Air Force Base. This award was due to our position as a leading provider of integrated electronic security systems and the investments in operational technology to innovate and lead in the emerging converged infrastructure market.

Now let's turn to Slide 6 to discuss our backlog. As I discussed on the previous slide, our award activity remains strong. Total backlog at $3.8 billion. And subsequent to the quarter end, our total pro forma backlog is $4 billion. The company's trailing 12-month book-to-bill ratio would equate to 1.6x based on a $4 billion pro forma backlog, taking into consideration part of the recent K-BOSSS modification, our 3 Navy awards that are under protest and the obligation associated with a subcontract, which is now expected to be performed by the prime contractor.

Additionally, regarding our OMDAC program, the contract is currently funded through August 28, 2020, and we have been notified that the contract will be extended for another 6 months. In terms of size, as a reference, OMDAC contributed $109 million of revenue during the first 6 months of the year. We believe the extension will be similar in size and adding to backlog once issued.

Our backlog is a unique attribute of our business and represents 2.7x the midpoint of our 2020 full year revenue guidance, which provides insight into our ability to continue to generate revenue and cash flow in future years.

Let's move to Slide 7 to discuss our new business pipeline. Our new business win rates remain solid, and I remain confident that our pipeline of new business opportunities supports continued growth in backlog and revenue. Our pipeline of opportunities continued to increase and is approaching $11 billion, which consists of $1.1 billion of bids that have been submitted and are awaiting award. Additionally, we have qualified new business opportunities valued at $9.5 billion that we plan to submit on bids in the next 12 months.

As a result of the global pandemic, contract extensions are becoming more prevalent, and it could shift some of the procurement awards to the right. However, given our backlog in recent awards, we believe Vectrus is still in a solid position to grow.

Please turn to Slide 8, where I will discuss how we are well aligned to mission-critical areas of the DoD budget. Regarding the federal spending environment and our Department of Defense client funding position, it is important to understand that over 90% of the work Vectrus performs is funded from the DoD operations and maintenance funding source, which, as you can see in the graph in the upper left, has been resilient through various economic and political cycles and is instrumental to maintaining DoD readiness.

Additionally, as a leading provider of facility support services to DOD, we believe the base operations and facility sustainment budget, which makes up over $40 billion of the $290 billion in O&M, is particularly relevant to Vectrus. This funding is necessary to keep facilities in working order while providing personnel and infrastructure support to sustain mission capability and quality of life. We believe this funding is vital to DoD mission-essential operations and readiness and that Vectrus is well positioned to continue to grow in this area regardless of the broader economic or political shifts.

Furthermore, while it is important to acknowledge and understand DoD spending and the budgetary outlook, as it pertains to Vectrus, we have been investing and expanding our strategic position to be a market leader in what we view as a much larger and rapidly expanding converged infrastructure market.

In summary, we continue to see prospects for future growth within our current DoD client set as well as the expansion into other federal and nonfederal domains, but, importantly, a significant opportunity to expand via the delivery of higher-valued, converged solutions and capabilities.

Now I would like to turn the call over to our Chief Financial Officer, Susan Lynch, for a review of the financials.

Thanks, Chuck, and good afternoon, everyone. Turn with me now to Slide 9 to discuss our second quarter results. Revenue increased $4.5 million in the quarter, a growth rate of 1.3% year-on-year. The company experienced revenue delays of approximately $22 million due to the COVID-19 pandemic. Most of the revenue impact was high-margin work that customers delayed due to limited base access issues. In addition, the company had onetime adjustments to revenue due to contract closeouts and, as Chuck mentioned, one specific European program. These adjustments reduced revenue by $4.2 million in the aggregate. Our K-BOSSS contract contributed $109 million of total revenue in the second quarter.

Adjusted EBITDA was $6.7 million or 2% margin. Adjusted EBITDA was adversely impacted by COVID-19, by $2.1 million and the contract adjustment and onetime closeouts of $8.4 million.

Second quarter 2020 interest expense was $1.3 million, flat to last year. Adjusted diluted EPS was $0.24 as compared to $0.74 last year. EPS was adversely impacted by $0.14 due to COVID-19 and $0.54 related to the previously mentioned adjustment.

Turn now to Slide 10 to discuss our liquidity. Year-to-date cash provided by operating activities was $34.4 million and included a $13 million benefit from the CARES Act. Cash ended at $62.7 million as compared to the end of the second quarter of 2019 of $70.3 million. Net debt was $4.8 million, in line with prior year. The company's leverage ratio was 1.08x. And liquidity, including cash on hand and the undrawn revolver was $180 million.

Let's move to Slide 11 to cover second half guidance. Our second half guidance reflects the delays in transition of LOGCAP V and newly awarded programs, which have slowed due to DoD COVID-19-related guidance and travel restrictions. Additionally, delays in protests on new business are limiting our ability to conduct transition and phase-in activities causing revenue and earnings to be pushed to the right. Therefore, our second half revenue will be in the range of $697 million to $717 million. We have estimated a $40 million impact from COVID-19 in the second half. We are working with our clients to ensure this revenue remains in our backlog and will be recognized as revenue in future periods. The company continues to work with its clients to maintain operations and plan a safe return to work in light of the COVID-19 pandemic. Due to the change in volume that I've discussed, we have initiated actions to align indirect costs and SG&A accordingly.

Adjusted EBITDA margin will be in the range of 4.8% to 5.0%. We have estimated approximately $2 million of adjusted EBITDA impact from COVID-19 in our guidance for the second half of the year. Adjusted diluted EPS will be in the range of $1.70 to $1.84 per share. The outlook for net cash from operations is $10.6 million to $20.6 million, which includes approximately $1 million from the CARES Act tax deferrals.

Now let's turn to Slide 12. The revised full year guidance for revenue is $1.385 billion to $1.405 billion, which includes an approximately $65 million impact from COVID-19. We are working with our clients to ensure this revenue remains in our backlog and will be recognized as revenue in future periods. Adjusted diluted EPS is estimated to be in the range of $2.68 to $2.82 per share, taking into consideration first half actuals and a $0.22 impact from COVID-19 expected deferrals, protests and delays in the second half of the year.

As previously mentioned, the company is benefiting from the CARES Act deferrals in the current year by approximately $14 million. The repayment of these deferrals will be factored into our 2021 and 2022 cash flow guidance. A graphical reconciliation of these changes to our guidance can be found on the next slide.

I'll turn the call back over to Chuck now. Thank you.

Thank you, Susan. And before we turn to questions, I would like to thank our people and summarize the prospects for our future. I would like to acknowledge the dedication and innovation that our entire workforce has demonstrated throughout the ongoing global pandemic. Our workforce, many times operating in remote and austere environments, has gone above and beyond to keep the mission we operate at a high level of readiness for our clients. The myriad of host nation and base-specific requirements and restrictions has been enormously complex, and the response of our people has been impressive.

Amidst the backdrop of the pandemic or organic growth engine powered by our growth team and client-tailored campaigns continue to perform very well. Our backlog is strong and represents 2.7x the midpoint of our 2020 revenue guidance. The LOGCAP contract affords Vectrus access to the INDOPACOM AOR, and as evidenced by our growing pipeline, bodes well for the future. Cash performance remains strong, and our clean balance sheet, essentially 0 net debt, provides us the opportunity to act on acquisition opportunities as they are in line with our strategy.

Susan did a nice job of describing our revised guidance. The impact of the pandemic on the timing of revenue is real, but so is the critical nature of the mission we operate on behalf of our clients. We, in conjunction with our clients, will utilize the remainder of the year to assess the timing of program transitions, considering the timing of potential COVID treatments and vaccines.

As I mentioned previously, our pipeline and backlog continue to grow during this period, and our balance sheet remains very strong. We remain well positioned for growth. This is a transformational time for our company, and I look forward to updating you on our progress.

Now I'd like to open the call to questions. Operator?

(Operator Instructions) Our first question comes from Joseph DeNardi with Stifel.

Chuck, can you just talk a little bit more about the contract charge? Just kind of what contributed to it? What, if any, lessons learned? And then does it influence '21, '22 earnings power at all? What's the margin impact of it going forward?

Yes, sure. The European contract that we discussed was an outcome-based contract, where we really had a disconnect between both volume and costs. The charge that we've taken this quarter in compliance with all the accounting regulations really takes us through the loss associated to the midpoint of next year. We are aggressively working with our client on this topic, and we expect to have the contract issues resolved going into the following option year, which would begin midpoint of next year. So the bottom line is we expect this to be the final charge with regard to the European contract.

Okay. And then you talked about interest from other customers on -- I guess, to use LOGCAP. Can you talk a little bit about kind of the magnitude of the opportunity? And then now that you're, I guess, into that contract a little bit, I recognize that it's getting pushed to the right. But can you talk with any more kind of specificity around kind of what the revenue opportunity from LOGCAP could be once you're fully ramped on that?

Sure. We're going to talk more here later in the year in terms of guidance for 2021. But I will say that we have received and we have responded to a number of task orders predominantly in the INDOPACOM AOR, ranging from Thailand to Korea to other places. So at this point in time, those tasks are not material, if you will, to 2020, but they do provide a really nice demand signal and what we would expect to see as LOGCAP V continues to mature.

Okay. And then maybe a question for Sue. When -- I guess, when you look at the green bar on Slide 7, is there a point in the next couple of quarters when a greater portion of that becomes green and -- that their larger contracts in the near term that you plan to submit? Or does that stay relatively steady going forward?

Yes. On the -- just to make sure you're on the pipeline chart, correct?

That's correct. Yes. I'm just trying to understand if there are any larger pursuits that are in the pipeline that you'll submit bids for in the near term. So kind of more of the pipeline is kind of pending award rather than not.

What we have seen -- because it's about a year out, we have seen the bids pending evaluation by our clients to be somewhere between the $1 billion and $2 billion range. There could be a situation, I don't anticipate it in the short term, where that could increase. But that's a good rule of thumb. And quite frankly, that, to this point in time, have provided a good cadence for contract award, which, again, we are very, very pleased and satisfied with our win rates. And we believe that those win rates are at least industry average, if not quite a bit more.

Our next question comes from Joe Gomes with NOBLE Capital.

Just real quick on -- with the whole COVID in here, you obviously talked about some of the contracts that you've won being pushed to the right. Are you seeing any slowdown in RFPs from the key customers also being pushed further and further to the right all due to COVID?

It's interesting, and as it relates to the other Joe's question a minute ago, the rate and pace of RFPs that we are responding to continues to be breakneck. It really has been quite significant. We are, however, and I mentioned that in our prepared remarks, seeing some of the awards slipping to the right. And presumably, that has COVID-19 reasons for that occurring.

I will tell you that during the height of the pandemic, and this was not in our prepared remarks, we did successfully transition into Deveselu, which is a win from a few quarters ago, which we had talked about a few quarters ago. So there is progress, but, by and large, the ability to access host nations and the ability to access individual bases has seen an impact from COVID. And we really expect to see those impacts until we have either a treatment and/or a vaccine.

Okay. And you mentioned here some charges -- not into the chart for M&A related. And just wondering if you might give a little more color or detail on that and maybe a little update on how the M&A pipeline is looking these days.

So Joe, this is Susan. So we actually -- when the COVID pandemic came out, there was pretty much a drying up of the M&A pipeline. I think a lot of deals were pulled just because the valuations were going to be dropped accordingly. We did pursue a target acquisition during the quarter that was strategic. Not all acquisitions you pursue come to fruition. And this one, we actually decide against. And so the M&A pipeline has refilled itself. There's actually a number of targets that we're looking at, and we'll be looking at a number of them very closely. And hopefully, there'll be one that will be a match for us at the right price.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Chuck Prow for closing comments.

Very good. Thank you very much, Robert. I appreciate everybody's time and attention today and look forward to updating you on our progress in the next quarter. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.