V2X Inc (VVX) 2021 Q3 法說會逐字稿

Hello, and welcome to the Vectrus Inc., Third Quarter 2021 Earnings conference call. (Operator Instructions) please note, today's event is being recorded. I'd now like to turn the conference over to Mike Smith, Director of Investor Relations and Corporate Development. Mr. Smith, please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Third Quarter 2021 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 adjusted non-GAAP metrics included 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. Before we get started, I would like to thank all of our employees for their dedication and remarkable contributions in supporting the recent evacuation of thousands of Afghan refugees, third-country nationals and Americans from Afghanistan. This undertaking was the largest noncombatant evacuation in U.S. history and our team's commitment to the mission and performance was exceptional.

I recently visited our overseas locations in CENTCOM and met with our teams and clients that directly supported this major humanitarian. The accomplishments, stories and the feedback I received from clients regarding the contributions of our employees was outstanding. I'll discuss some noteworthy highlights shortly. Please turn to Slide 3. Our third quarter results were strong, driven by a 30% year-over-year increase in revenue. Organic growth was also strong, increasing 13% year-over-year, reflecting expansion in our core business, new wins and phases. The ability to generate substantial cash from operations remains an important characteristic of our business. And during the quarter, we delivered $39 million of operating cash flow.

Adjusted EBITDA margin in the quarter was 4.5% and adjusted diluted earnings per share increased 19% year over year to $1.15. We are continuing to grow and expand our presence in the Pacific or INDOPACOM. For example, just last month, we were awarded a task order with an 8-year performance period to provide logistics and support in the Philippines. In addition, we recently completed the pre-transition site survey for our LOGCAP V Kwajalein task order, and we anticipate the phase-in to start by the end of the year and to reach full operational capability and revenue run rate by mid-2022.

Importantly, our revenue in INDOPACOM now makes up approximately 5% of our total revenue versus 1% in the same period last year. We believe INDOPACOM will be a key long-term growth driver for Vectrus, given the DODs intent to improve posture in the region. Our prime position under LOGCAP V enables us to support our clients throughout the full range of operations in the region over the next decade.

Our client campaigns remain instrumental to our growth and diversification strategy. During the third quarter, we continued to build on our Navy campaign and recorded several notable technology-enabled wins that further our position as the premier converged infrastructure company. We also continue to advance our leadership in 5G and are supporting cutting-edge testing and experimentation for the DOD. For example, we recently supported the successful demonstration of a 5G network for smart warehouse and see significant applications for our clients' converged infrastructure operations. We ended the quarter with a total backlog of approximately $5 billion and pro forma total backlog of $5.1 billion. Given our solid year-to-year results, we are reiterating our 2021 guidance ranges.

Please turn to Slide 4. Vectrus is well-known for its ability to provide rapid response convert solutions across all-time zones and operating environments, which was demonstrated in full by our team during the recent mission to evacuate various populations from Afghanistan. Supporting our clients' mission, this was a historical undertaking that our teams tackled with the highest level of skill, precision and dedication. In one case, our team received a LOGCAP V task to build out living space that could accommodate several thousand Afghan refugees in 45 days.

Our teams worked around the clock under extreme weather conditions to design, construct and operate over 250,000 square feet of living space. This was a remarkable achievement. And while we have 1 example shown on this slide, several Vectrus locations in CENTCOM, including Qatar and Bahrain supported this important humanitarian effort. I'd like to commend our entire team for going above and beyond to support this critically important mission.

Please turn to Slide 5. Our client campaigns remain instrumental to our growth and diversification of our business. The momentum associated with our Navy campaign continued in the third quarter with several noteworthy technology-based wins that further our position as a premier converged infrastructure company. First, Vectrus was awarded a prime OTA contract to provide automation and the receipt and tracking of materials for the Naval Air Warfare Center Aircraft Division. Under this small but important contract, we will provide a solution that utilizes RFID technology to automate the receiving and distribution processes while providing readily available metrics and reporting, indicating material delivery, location and quantities.

Secondly, Vectrus was awarded a contract to further develop their real-time spectrum operation software for the Navy's fleet. RTSO is a capability integration effort responsible for providing spectrum planning, sensing, monitoring, prediction and maneuvering capabilities to support electromagnetic spectrum operations. This award was based on our decades of experience providing leading edge electromagnetic environmental effects engineering and spectrum operations.

Finally, Vectrus was awarded the position on the $93 million 5-year multiple-award IDIQ contract to provide R&D, engineering, integration, cybersecurity, upgrade and sustainment for various tactical threat systems for the Navy. This award represents both the new client and an expansion in our capabilities. The result of our Navy campaigns are seen in our financial results with Navy revenue increasing 180% year-over-year, driven by organic wins and M&A and now comprises 11% of our total revenues versus 5% last year. We believe that based on the opportunities in our pipeline and client demand signals, our work with the Navy will continue to expand over the next several years.

Please turn to Slide 6. We are continuing to build Vectrus' position as a leader and innovator in 5G and converged infrastructure enablement by utilizing our operational expertise and solutions in support of the largest full-scale 5G test for dual-use applications in the world. You may recall that a year ago, it was announced that Vectrus was awarded 2 contracts as part of the DOD's 5G experimentation and testing at 5 U.S. military test sites, which was earmarked at $600 million. Recently, the DOD completed its first 5G project demonstration of a smart warehouse for Marine Corps logistics base Albany. Vectrus supported the successful demonstration and, as a subcontractor, assisted in the design, development and installation of a radio area network testbed.

The network will enable a broad set of smart warehouse use cases such as warehouse robotics and holographic augmentation and virtual reality applications as part of a modernizing Marine Corps operations. We also recently demonstrated the Vectrus converged infrastructure of 5G, 3D logistics hologram at the Army's annual industry conference, AUSA, last month. The Vectrus use case is unique and that it shows a hologram guiding the user through a warehouse to find a specific item. After finding the item, the system can then scan a code to display a 3D image of the item's contents. The ability to be directed to a specific item and then visually confirm the item in real-time adds incredible value to the warehouse operators.

Our second 5G contract is a 3-year prime contract for the Naval Base Coronado Smart Warehouse under which we will provide industry-leading inventory management, network security, robotic material moving and environmental sensing capabilities. We are currently working on Phase 1 of that prototyping effort and our team recently demonstrated how augmented reality and RFID location services can assist clients. We believe there is a significant long-term growth opportunity associated with the enablement of 5G and our clients' migration to converged infrastructure operations.

Vectrus is investing to capture the expected future growth as part of the 5G initiative. For example, we recently launched the Vectrus 5G network for integration, connectivity and experimentation or the Vectrus 5G-NICE lab that includes a mockup warehouse to be used for development, testing and demonstration purposes, innovative technologies to be demonstrated include RFID tags and portals, small and large autonomous movers, smart shelving, smart lockers and augmented reality, mixed reality pickup and pull technologies.

Please turn to Slide 7. We are making great progress advancing our IoT, sensor integration, machine learning and data analytics offerings, which are allowing us to deliver a more integrated and comprehensive suite of solutions. We are also extending our differentiated solutions to new clients and markets. For example, as part of the CBRN OTA contract, our team recently deployed 9 newly designed Integrated Early Warning dropbox sensor enclosures at the 2021 Indianapolis 500. The sensors were designed to detect and notify stakeholders of a potential bioweapon release.

Security units utilize the newly developed IEW dropboxes that incorporated various biothreat, chemical and meteorological sensors with Vectrus' sensor management system software. This unique combination of sensors and software allowed for the integration and processing of sensor data from multiple sources as well as data analytics and visualization at the local command center. The Vectrus software that was inside the sensor enclosure enables fast data processing and a user-friendly interface, allowing local police, energy and public health departments to view real-time data for the event. We are proud to have supported this important operation with a new client and a new market.

Please turn to Slide 8. Our new business pipeline is approximately $11 billion, with $2.1 billion of bids submitted awaiting award and $8.7 billion that we plan to submit over the next 12 months. As you can see on the page, our new business pipeline reflects our continued focus on executing targeted growth campaigns to diversify our portfolio. There is also a greater concentration of higher-margin solutions-based opportunities in our pipeline, which are driven by the organic and inorganic investments we've made in the business. I'd like to note that the withdrawal from Afghanistan resulted in a slight erosion of our pipeline, but we have since redeployed those business development resources to other pursuits.

Lastly, our pipeline does not currently include any LOGCAP V-related opportunities and only an immaterial amount of international client opportunities given the fluid timing associated with those efforts. Overall, we remain confident in our ability to successfully compete and win our fair share of new business. Now I'd 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. Please turn with me to Slide 9. Third quarter 2021 revenue grew 30% or approximately $107 million year-on-year to $459 million. Excluding the contribution from our 2020 acquisitions, organic revenue grew 13%. Organic revenue was driven by expansion in INDOPACOM, ramped to full operational capability on LOGCAP V Iraq and expansion in our core business, including support of the humanitarian refugee mission.

Adjusted EBITDA for the third quarter of 2021 was $20.5 million or 4.5% margin compared to 4.8% in the prior year's quarter. Margin in the third quarter was influenced by the timing and phase-in of new awards, program completions and increasing volume of material and pass-through content, which carries a lower fee. Third quarter 2021 interest expense was $2 million, up approximately $1 million year-on-year to the company's 2 acquisitions.

Diluted earnings per share for the third quarter of 2021 was $0.87 adjusted diluted EPS, adding back amortization from acquisitions, M&A and integration costs and removing the benefit associated with prior year's tax credits was $1.15. Relative to last year, adjusted diluted EPS increased 19% due to the company's organic revenue growth, income from our 2 acquisitions, a lower tax rate, offset by higher M&A-related interest expense.

Operating cash flows were $39.4 million for the quarter compared to $3.3 million in the same period last year, an impressive result that was driven by our team's focus on cash collections and process improvement. Operating cash flows were $53.4 million for the 9-month period compared to $37.7 million in the prior year's period. Excluding the prior year benefit of the CARES Act Payroll Tax deferrals, year-to-date cash flow from operations improved 92% over last year.

Please turn to Slide 10. We continue to focus on diversifying our portfolio through organic and inorganic investments. Our recent results with the Navy have been outstanding, with revenue growing 180% year-on-year and now representing 11% of total revenue compared to 5% during the same period last year. Our organic growth and strategic acquisitions have also further diversified our geographic portfolio. In the third quarter, our revenue in INDOPACOM, or Asia, grew approximately $19 million year-on-year and now represents 5% of total revenue. Our targeted focus on increasing our capabilities and presence in the region as well as the phase-in of LOGCAP V is now visible in our results. Our footprint in INDOPACOM will continue to increase as we ramp up the Kwajalein task order and our recently awarded work in the Philippines.

Additionally, our U.S.-based revenue composition grew to 30% of total revenue as compared to 25% of the same period last year. Lastly, our contract mix has shifted to a greater percentage of cost type revenue compared to the third quarter of 2020. This is partly due to COVID-19 impacts on revenue last year and the ramp of LOGCAP V this year.

Please turn to Slide 11. Third quarter 2021 total backlog was $4.9 billion compared to $3.7 billion in the third quarter of 2020. Total pro forma backlog was $5.1 billion and includes contract wins currently under protest. Funded backlog was $1.2 billion. The company's trailing 12-month pro forma book-to-bill ratio was 1.4x compared to 1.5x in Q3 of 2020.

Please turn now to Slide 12. Cash at quarter end was $53.4 million. Total debt was $128 million and net debt was $71.8 million. Both total and net debt were up from prior year due to the acquisitions of Zenetex and HHB on December 31, 2020. Strong cash generation further strengthened our balance sheet and provided the ability to pay down an additional $45 million of debt in the quarter. Total and net debt were down sequentially from Q2 2021 by $47 million and $33 million, respectively. The company's total leverage ratio was 1.33x, well below its covenant level of 3.5x. We plan to utilize our strong balance sheet to enhance Vectrus' position in the market through organic and inorganic investments that align to our strategy. Finally, we are nearing the maturity of our current credit facility and plan to leverage the significant advancements in our business and strong balance sheet to introduce a larger, more favorable, flexible and lower cost facility that supports our growth plan.

Please turn to Slide 13. Given our strong year-to-date performance, we are reiterating our previous 2021 guidance ranges. Revenue guidance is $1.745 billion to $1.78 billion or 25% to 28% growth. Adjusted diluted earnings per share guidance is $4.76 to $5.07 or 42% to 51% growth. The adjusted EBITDA margin range is 4.8% to 5%. And we expect net cash provided by operating activities to remain in the range of $58 million to $65 million. Capital expenditures are expected to be approximately $8 million. And as a reminder, program related capital expenditures are considered in contract pricing and will be recouped all or in part over the performance of the contract.

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

(Operator Instructions) And the first question comes from Joe Gomes with NOBLE Capital.

Another really nice quarter. I just seem to be putting them stringing them together here. On INDOPACOM, awesome job there. Is there any kind of way to size the potential opportunity there? I know a lot of these things come about based on the contracts and everything. But I don't know where if you can give us any kind of more detail or color of the potential for INDOPACOM could actually mean to Vectrus?

Joe, this is Chuck. Great question. INDOPACOM, it is an increasing portion of our overall pipeline. We don't really talk about the composition of the pipeline per se, but it is rapidly increasing Point 1. Point 2, as you know, Kwajalein was one of the tasks that we were awarded during LOGCAP. And Kwajalein is currently, as we stated in the prepared remarks, currently, beginning the phase-in and should be fairly phased in fairly well phased in, excuse me, by the middle of next year. We do expect that contract to be more than 10% of our revenue. So we will begin to report that as that comes online.

In the last part, as you hear from a geopolitical perspective quite often, that the pivot to Asia is real from both a military and form policy perspective. And our results, both in this quarter as well as the prior quarter were favorably impacted by the Pacific Defender activity. And that activity or the contingency operation to support an exercise, and we expect to see that type of activity continue and, in fact, increase over the coming years. The last point on the Pacific Defender is that is a real example of how the contingency operations portion of the LOGCAP contract will increasingly affect our financials, making our financials, in many cases, a bit more lumpy. Because that kind of revenue really doesn't show up in backlog. And in the case of Pacific Defender, the opportunity was identified. It was booked and it was billed in less than 2 quarters.

So, great question, and to your point, we will consider, and we are considering, I should say, providing a bit more color to our pipeline in the future. So we can demonstrate where we think we have emerging demand.

Okay. Much appreciated. And 1 of the recurring themes here on a lot of the companies, at least that I follow, is the very difficult labor market and difficulty in finding staffing and combined with the vaccine mandates that have been issued by the Biden administration, especially for federal contractors. I was just wondering how you guys are dealing with or finding staffing ability -- availability, excuse me, here? And where do you guys -- I guess, on the spectrum of being getting the workforce vaccinated? Are you having issues with that? Is it something that's moving smoothly here? Just curious as if it could potential hiccup down the road here.

So a lot of questions and in your one question. So let me kind of break them down piece by piece. Like other companies, we continue to face challenges in terms of identifying and deploying resources. As you know, a big part of our business model is the use of foreign national and local labor. So in terms of keeping our program staffed, COVID has been difficult. But as you can see by our results, we've been able to find the right types of people in the right location to continue to drive revenue.

With regard to the vaccine mandate. First of all, we take this very seriously. We've been tracking both COVID effects and COVID mandates from the beginning. We, as most other businesses have been affected by COVID, and we look to get our staff vaccinated per the order as quickly as possible. It's important to note, however, that as you know, 80% of our business approximately comes outside the Continental United States. And the current executive order is really focused on U.S.-based employees. So we have -- while the need exists to get people mandated as quickly as possible to keep our people and our clients safe. The mandate effect itself really affects our corporate office and our U.S.-based contracts more directly.

Okay. And one more, if I may. Again, really, really nice quarter here. But you didn't raise the guidance. You kept it the same. One would have thought that showing such a nice quarter, maybe you would have increased a little bit. I was just kind of the thought process as to -- are we just being a little more conservative here? I know that there's the - we're operating under a continuing resolution. Did that have a play in your thought process of maintaining guidance where you had it at the end of the second quarter?

It's really a threefold answer to your question. First of all, we're going to have a very solid year this year. At the midpoint, well over 25% growth, total growth, I should say. We are I would call it being conservative, but we are being mindful of 3 things; thing one is like everyone else, we did have, not everyone, like many other companies in our industry, we did have some effects from Afghanistan that were not overall material, as we talked about in our last call, but there were some effects from Afghanistan, point 1. Point 2 is we do have a number of contracts in transition and closeout between prior contract structures and new contract structures, such as LOGCAP.

And the final point is that we were greatly benefited in Quarter 2 and Quarter 3 from the contingency work that I described earlier. And so one of the areas that we need to continue to work with, you and your colleagues and our investors that, with the blessing of LOGCAP comes a bit of reeducation in terms of how our revenue can be a bit lumpy, if you will, quarter-to-quarter. Having said all of that, we are not prepared, and we're not going to give 2022 guidance yet. But I do see that I look into 2022 at an organic business base that will lead again to growth in 2022.

Thank you, and this concludes the question-and-answer session. I would like to return the floor to Chuck Prow for any closing comments.

Thank you, and thanks for everyone for joining the call today. We look forward to catching you up on our full year performance the next time we get together. Thanks a lot, and have a good day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.