V2X Inc (VVX) 2020 Q3 法說會逐字稿

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

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

Thank you. Good afternoon, everyone. Welcome to the Vectrus Third 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 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. 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 non-GAAP metrics, including adjusted operating income and margin, EBITDA and EBITDA 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. Good afternoon, everyone. Thank you for joining us on the call today. Tomorrow, November 11 is Veterans Day. So before I begin, I would like to take a moment to recognize all veterans for their service to our nation, particularly those who are part of the Vectrus team and support many of our clients' critical missions, oftentimes in remote and austere environments. We thank you for all you do for our nation and for our company.

Please turn to Slide 3. Our performance in the third quarter was solid, with our financial results reflecting strong revenue and profit. As expected, COVID-19-related Host Nation and Base Access restrictions across the contract portfolio impacted our results.

Third quarter revenue increased 4.9% sequentially, but declined 2.1% over the prior year, including COVID-19 impact of $12.9 million or 3.7%. Adjusted EBITDA margin of 4.8% was one of the highest on record for Vectrus, and was impressive considering the estimated 40 basis point impact from COVID-19. Adjusted EPS was $0.89, and absorbed an estimated $0.14 impact from the COVID-19 deferrals.

During the quarter, we continued to execute well on our growth strategy both with respect to our client growth campaigns and our expanded capabilities as a converged infrastructure provider. The Vectrus team recently achieved a strategic milestone and was awarded a prime contract for the Navy smart warehouse prototype of 5G applications.

This contract relates to the DoD's 5G experimentation and testing at 5 U.S. military test sites. This is strategically significant for several reasons: first, while we have received awards for our technology capabilities, this is a testament to our clients' migration towards the converged infrastructure market; second, it represents the largest full-scale 5G test for dual-use applications in the world; and third, it puts us into an additional competitive arena focused on technological solutions that are now being applied within the traditional BAS and IT services.

The DoD had earmarked $600 million among all contractors and test sites for this initiative. Vectrus will provide industry-leading inventory management, network security, robotic material moving and environmental sensing capabilities at Naval Base San Diego. This award is a result of our deliberate and strategic investments to expand our capability to help our clients move from a traditional way of operating their facilities, supply chains and networks to a much more instrumented and converged approach. I want to congratulate our teams for this achievement.

We were also recently awarded a position on the best-in-class general service administration, multiple-award contract, indefinite delivery, indefinite quantity vehicle, also known as OASIS. This vehicle provides integrated professional services for all government customers worldwide. This award demonstrates our increased capability to function as a prime contractor in large-scale IT as well as our traditional markets. This award would not have been possible without the contribution and capabilities, contracts and performance obtained via our acquisitions over the last 3 years.

This IDIQ allowed Vectrus to benefit from an additional funding stream that we did not have previously. For example, over the past couple of years, federal clients have spent approximately $2 billion annually on this vehicle.

Our backlog continues to grow at double-digit rates, up 23% year-over-year to $3.7 billion at the end of the third quarter. Our trailing 12-month book-to-bill ratio as of the third quarter was 1.5x. With respect to LOGCAP V, we continue to phase in operations and transition to the new contract and task orders, albeit at a slower pace due to COVID-19-related travel and base restrictions.

As we discussed in our last call, the original LOGCAP V, 180-day transition phase-in period has been elongated as a result of the global pandemic. We anticipate full operational capability on LOGCAP V task where we have incumbency by mid next year. LOGCAP V tasks that represent new scope are also progressing, but at a slower pace. We continue to be actively engaged with our clients and have received new task orders and/or evaluating others in both CENTCOM and INDOPACOM. Although these new tasks are smaller in size, they represent strategically important missions that provide a foundation for future growth.

Further, we continue to see demand from clients outside the Army to utilize LOGCAP V program to support their critical mission requirements. Given the year-to-date and current performance we are seeing on our program, we remain confident in our 2020 outlook and as such, are reiterating our full year guidance.

Our priorities for the remainder of this year and for 2021 are: first, continued execution and delivery on all of our programs while keeping our teams and our clients safe under COVID-19 conditions; second, further expanding our pipeline of opportunities in both converged and traditional markets; and third, continuing to pursue M&A that supports our strategy of expanding our capabilities and client base.

Please turn to Slide 4 to touch on our notable contract wins. During the course of 2020, Vectrus received over $2 billion in awards, by delivering exceptional program performance to our clients, investing in our people and our capabilities to further raise our value proposition, and adhering to our growth strategy of conducting targeted campaigns designed to leverage our expertise and the value we deliver to our clients.

In addition to the awards I mentioned earlier, we have announced a few weeks ago that Vectrus won a $196 million 5-year recompete contract to continue base operational support at Naval Station Guantanamo Bay in Cuba. The initial 2-year award of this outcome-based contract in late 2018 was an important strategic win for Vectrus that kicked off our Navy growth campaign, which, in aggregate, equates to over $0.5 billion of wins, not including wins of approximately $350 million through our new joint ventures.

This award is currently under protest, and we look forward to providing even better client outcome with the new 5-year period of performance. The INDOPACOM award under LOGCAP V has strongly positioned us for additional work in that region across our client portfolio. For example, during the third quarter, we won a $5 million task order under the Naval Global Contingency Services Multiple Award Contract to provide operation support services at United States Army Reserve at several locations in INDOPACOM.

Additionally, as we discussed with you on our last call, we were awarded at a $529 million modification for our K-BOSSS program that extends the contract from September 2020 through September 2021, to support the transition of LOGCAP V CENTCOM task order. It is important to note that only half of the award value is currently included in our backlog.

Let's move to Slide 5 to discuss our new business pipeline. While protests have impacted the timing associated with contribution from our recently won programs, our prospects for additional new business wins remain solid. Our pipeline of new opportunities is up this year-over-year with a $1.7 billion of submitted bids and $8.3 billion of qualified opportunities we plan to bid in the next 12 months. Additionally, our new business pipeline does not reflect any task orders associated with our recently awarded seat on Oasis as this contract was not previously acceptable to Vectrus. I remain confident that Vectrus will continue to win its fair share of new opportunities.

Please turn to Slide 6, where I will discuss our alignment to the mission-critical areas of the DoD budget. Over 90% of the work Vectrus performed is funded from the DoD operations and maintenance funding source, which, as you can see in this graph on the left has been resilient through various economic and political cycles as it is instrumental in maintaining readiness for the Department of Defense.

Additionally, as a leading provider of facility support services to the DoD, we believe the base operation in the facility sustainment budget which makes up over $40 billion of the $290 billion in operations and maintenance, 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 for personnel on the base. 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 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 continue to see prospects for future growth within our current DoD client set as well as the expansion to other federal and non-federal domain, but importantly, a significant opportunity to expand via the delivery of higher value, converged solutions and capabilities.

Now I'll turn the call over to CFO, Susan Lynch, to review the numbers. Susan?

Thanks, Chuck, and good afternoon, everyone. Turn with me now to Slide 7 to discuss our third quarter results. Revenue was $352.4 million for the quarter, down 2.1% year-on-year or $7.5 million. A result of the revenue delays of approximately $12.9 million due to the COVID-19 pandemic. Most of the revenue impact was high-margin work that customers delayed due to limited base access and social distancing restrictions.

Revenue increased sequentially $16.4 million or 4.9% as several bases eased access restrictions and developed return-to-work plans. Adjusted EBITDA was $17 million, a margin of 4.8%, representing the second highest margin rate in the past 10 quarters. This is an impressive accomplishment as EBITDA margin includes an estimated 40 basis points of COVID-19 impact. Our margin reflects the strength of our underlying business and continued execution on our enterprise-wide performance improvement initiatives.

Third quarter interest expense was approximately $900,000, roughly half of the amount in the same period last year due to continued favorable operating cash flows resulting in higher cash balances, lower usage of the company's revolving credit agreement and increased cash flows as a result of the CARES Act of approximately $10 million.

Adjusted diluted EPS was $0.89, $0.18 higher than the same period last year. EPS and adjusted EPS were adversely impacted by the deferral of high-margin work due to the COVID-19 pandemic, which is estimated at $0.14 of EPS for the quarter.

Turn with me now to Slide 8 to discuss our backlog. Total backlog is $3.7 billion, which represents a trailing 12-month book-to-bill ratio of 1.5x, including the Naval Station Guantanamo Bay award, which is currently under protest, our pro forma total backlog was $3.9 billion. Our OMDAC program contributed $158 million of revenue during the first 9 months of the year, and has been extended and funded through the end of February next year. The recompete contract is pending award, and we believe the award should be made by February. We are confident in our position as incumbent, and if awarded to Vectrus, the value of the award would significantly add to our backlog and increase our book-to-bill ratios substantially.

Turn now to Slide 9. Year-to-date cash provided by operating activities was $37.7 million, which includes an estimated $10 million benefit from the CARES Act. Cash ended at $63.7 million as compared to the third quarter of 2019 of $41.1 million. Net debt was close to 0 at $2.3 million, a reduction to prior year of nearly $30 million. The company's leverage ratio was 0.99x, and liquidity, including cash on hand and the undrawn revolver was more than $180 million. Our strong liquidity and low leverage positions us well to weather the pandemic environment while investing for growth both organically and inorganically.

Let's move to Slide 10 to cover guidance. Our full year guidance remains unchanged. Based on our Q3 2020 results, we now believe that our full year performance should be in the mid- to high end of the range with cash in the low to mid-range as a result of customer delays in reimbursement for COVID-related cost.

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

Thank you, Susan. In closing, we delivered a solid third quarter performance considering the impact of the pandemic. We did this by focusing on consistent execution and our commitment to our clients' missions. We achieved a strategic milestone in our converged infrastructure market award putting Vectrus on the short list of capable providers as this market takes shape.

Our talented growth team continues to run our organic growth engine smoothly, aggressively driving our client tailored campaigns. The LOGCAP contract and presence in INDOPACOM AOR already adds to our organic growth opportunities. We have a strong backlog that represents more than 2.5x the midpoint of our 2020 revenue guidance. The high free cash flow characteristics of our business and strong balance sheet with essentially 0 net debt provides the ability to make acquisitions that align with our strategy.

I want to take a moment to thank our entire workforce for their continued dedication, fortitude and resourcefulness every day as we face the ongoing global pandemic. Our teams remain determined, yet flexible, regardless of remote and austere operating environments, maintaining a high level of operational readiness for our clients, navigating host nation and base-specific requirements and restrictions have been complex and fluid, and our people continue to deliver.

Now I'd like to turn the call back over to the operator.

(Operator Instructions) And our first question is from the line of Joe Gomes with NOBLE Capital.

Nice quarter. Real quick on OMDAC. That was kind of supposed to be awarded here 4, 6 weeks ago. It just seems to be going on the award. Any thoughts or why that might be taking longer to -- for them to come to the award or announce the award?

No, no, it's a large award, as you know, and we don't read anything into the specific timing. So we do expect to hear on the OMDAC recompete sometime this year still. We continue to receive extensions in the field and operate very well. So again, we would expect to have something here before the end of the year.

Okay. And real quick on the new business pipeline. If I look -- compare that to what the numbers were for the second quarter, the second quarter you had a total of $10.6 billion, now we're at $10 billion. The bid submitted went from 1.1 to 1.7, but -- from -- and then the plants of cement went down a little bit. Just trying to figure out what is going on there that would drive the number, the overall number down sequentially.

As we mentioned last quarter, the volume of bids being submitted was very high. It's high today, so I don't read anything into that other than the fact that the pipeline is robust. Our new business teams are working very hard. So I think we have plenty of pipeline to yield the types of yields that we need for '21 and beyond. So short answer to your question, I don't read anything into it. The temporal stays very high. And quite frankly, I like a lot the types of things that we're bidding. They're more aligned with that converged infrastructure opportunities that we have been anticipating and that we now see emerging in our pipeline.

Okay. One last one for me. You mentioned in your prepared remarks that you've been seeing some demand from clients outside the Army to use LOGCAP. I was just wondering if you provide just a little more color or detail on that.

Sure. In the INDOPACOM area of operation, in particular, the Navy is the predominant service. And we're working with our Navy clients to understand that contract vehicle, building some bridges between the Navy and the Army. And we really like the shape of the emerging Navy opportunity that could potentially use the LOGCAP contract as well.

We have other contracts that we recently won in INDOPACOM as well, which are not LOGCAP. And I mentioned that in the prepared remarks. That are 100% because we now have presence in the theater, whereas in the past we did not have that type of presence.

(Operator Instructions) The next question comes from the line of Joe DeNardi with Stifel.

This is Jon on for Joe. Good quarter everyone. Chuck, I think the first question I just want to ask is around margins and how you're thinking about next year. Is this level kind of just a COVID one-off with SG&A? Or can -- does this have legs beyond 2020? And we can see SG&A kind of come down over the next year to 2 years. If you guys could just give us some puts and takes around how you're thinking around margins going forward in the age of COVID, I'd appreciate it.

Yes. So -- this is Susan. I'll actually jump in there, and Chuck can fill in where I miss. As we've mentioned in prior quarters, we have Enterprise Vectrus, which focuses the company and our internal resources on a variety of Six Sigma and Lean projects. We've worked hard to automate not only internal manual processes, but processes that are customer-facing, like work order management. And so -- and we've even done things like working capital, improving our DSOs, et cetera. And I think that is a large factor of what is driving the margin improvement and we hope that, that is sustainable. It's certainly our goal to be sustainable going forward into the out years. You know that we have this goal of achieving $2.5 billion in revenue by 2023 and 7% in EBITDA margin. And so that has always been one of the tools in our tool chest with Enterprise Vectrus.

The second thing is the reason why we've shifted and tried to shift some of our portfolio into fixed price programs is as we get better in delivering those programs, there is a higher margin available to the company. And I think you're seeing all of that come together. We are just constantly -- as we sit back and take a look at the quarter, a 4.8% adjusted EBITDA margin when we had such a large impact in some of this add-on work that is completely variable and at our customers will that we weren't able to actually include that in our results. It is still an amazing margin that we have for the quarter. Chuck?

Well done. And from the time that we had announced our path to $2.5 billion and 7%, I have always said that getting to 7% would be a little bit trickier. And it's going to take a while for the performance improvement initiatives that we have been implementing to take hold. And I'd like to think that, that's what we're beginning to see. So more to come, and we'll track this, obviously, every quarter. But I would like to thank our team for all their hard work that allowed us to generate this result. And thanks for the question.

At this time, we have reached the end of our question-and-answer session. And I will now turn the call over to Chuck Prow for closing remarks.

Very good. Thank you very much, and thanks for attending today's call. We're pleased with our results, and we look forward to updating you further in our next call. Have a nice day.

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