Q1 2020 Earnings Call
Thank you for joining us today for the Vectrus first quarter 2020 earnings conference call and webcast.
Today's Cosby recorded my name is Robert and I'll be the operator for today's call.
At this time, all participants have been placed in a listen only mode falling management's presentation.
Opened up the cost for the question and answer session at that time, if anyone would like to ask a question you merely prestart one on your telephone keypad.
And now all past the call over to your host Mike Smith, Vice President of Investor Relations and corporate development <unk>.
Thank you you may begin.
Thank you good afternoon, everyone.
Welcome to the Vectrus first quarter 2020 Springs Conference call.
Joining us today or Chuck Pro President and Chief Executive Officer.
Didn't Lynch senior Vice President and Chief Financial Officer.
<unk> presentation are available on our best relations website investors Dot <unk> dot com.
We started to fight too.
During today's presentation management will be making forward looking statements pursuant to the tape Harvard provisions of the federal security bar.
We are safe Harbor statement in our press release and presentation materials for description of some of the factors that may cause actualresults to defer materially from the results contemplated by these forward looking statements.
Accompanied seems no obligation to updated forward looking statements.
Additionally, I'd like to point out that we'll be discussing and recording adjusted Nongaap metrics acquitted adjusted operating income and margin adjusted EBITDA and margin adjusted net income and adjusted diluted earnings per share. The definition of these nongaap measures can be found in our presentation materials pressrelease.
And for 10 Q.
At the time I'd like to trying to call over to Chuck Pro.
Thank you Mike and good afternoon, everyone. Thank you for joining us on the call today.
Quarter, we in every business around the globe have been adjusting to the covert 900 pandemic and keeping our employees clients and partners safe.
Vectrus provide critical infrastructure support services globally for a variety of national security missions.
Core competency combined with our backlog of long term contracts with the U.S. government.
Operating in financial resiliency.
<unk> predictable free cash flow.
Foundational Charvis has model.
We are proud of the contributions our teams are making to support our men and women on the front lines at such a difficult time.
The same time, we are not distracted from our opportunity to transform vectrus and do a leader in the emerging converged infrastructure market and as such our strategic priorities remain unchanged and achievable.
Please turn to fly three and left touch on our first quarter results. We began the year of expected with continue top Y. gross revenue grew 8% think she won.
She has supported by a solid organic growth at 4% and a minimal impact from covert 19, if growth came from a 14.6 million dollar expansion our on our existing programs.
11.2 million dollar contribution from our acquisition of advanced door.
Are quiet portfolio and revenue base continue to diversify and we expand our market share with the Army Navy and the Air Force.
We also improved our profitability in the quarter through continued focus on program delivery excellence.
Adjusted even a margin expanded 30 basis points to 4.2% on the first quarter and we grew adjusted E.P.F. by 9%. Despite his <unk> per share hadwin covert 19.
We achieved improved results, even why can while continuing to invest in our business, including starting log cap five.
You are growth related efforts, we continue to when new business with all of our major clients.
Regarding our army client.
We are expanding our flip <unk> five and other new program wins.
In recognition of our rapid response supply chain capabilities, we recently want a task quarter to provide supply chain as a service capability to pick care, a covert 19 personal protective equipment for the army to research development acquisition, Yeah production program.
While small and value demonstrates our clients recognition of Vectrus gears, having the ability to offer an immediate solution for something as urgent and critical S.'s safety and health of those conducting ongoing national security missions during an emergency.
In another recent award we will provide software an engineering to support censored data integration and visualization of our nation's investments and chemical biological radiological and nuclear to fast equipment to the joint services.
You put different context. This war it came to us in part as a result of our legacy ancestor integration dating back to 1995.
As we reported in our last call in February.
122 million dollar modification of the Ondecks walk a contract.
Enterprise network capabilities and services to support the <unk> Central command.
That concludes operating the army largest cyber setter and network footprint across the middle East.
Yes, that's particularly important now as a critic <unk> you need to maintain security and reliability of the Army's 24, seven connected networks have never been higher.
Our team throughout Finchem rapidly adjusted to a variety of health and safety requirements across the country countries we operate.
While maintaining network uptime across borders.
Worth, noting that Vectrus again received ADESA central facility of the year Award for network reliability admission essential critical operations associated with this program.
While this contract is still under Recompete. We believe we are in a position to retain this program that we have been supporting since 1995.
Our airport campaign continues to drive growth in April we were awarded a seat on the Air Force contract augmentation program or have kept five.
Air Forces 6.4 billion dollar I'd I.Q. contract vehicle.
Vectors plus first awarded a position on the <unk> cap contracted in June 2015.
Since that time have 113 task orders and multiple country worth over $130 million.
We have placed significant emphasis on our air force growth campaign, which has resulted in a 24% compounded annual revenue growth rate for the three years ending 2019.
And in total half position Dustin 13 countries countries with us quiet.
Recently, the Air Force elected to F. 35, a location for the Air Force National Guard, which will necessitate enhanced electronic security required by the D.O.D.C.'s fifth generation fighters.
Because of advance toward the experience protecting the F. 35 fleets, we see a strong opportunity for us to increase content and to protect the the advanced aircraft at new locations. Additionally, we see opportunity for advanced right to provide it have to electronic security at airports installations and support.
Mobile aircrew strategic network terminal.
Advanced or is the base White security system. One two of these early basis, receiving the terminal installations as part of this ground network.
<unk>, well permit command and control through advanced communications satellites to the airport strategic powerfully as well as a tanker at intelligence fleet.
Ground capability will initially be installed at approximately 50 airforce bases and we believe will be an additional stream of business for advanced or due to our dominance in the base wide electronic security system at these installations.
Our Navy campaign also continues to be successful we discussed last quarter Carwin on an eight year 45 million dollar contract to provide base operations support and divest salute, Romania. The first aegis to shore missile defense facility placed into operation.
Despite the Corona virus background part transition team with onsite and preparing to transition later this year.
We also want a small but strategically important operational technology contract.
To provide electro electromagnetic affects engineering, leveraging our legacy in protecting ships communications.
And finally subsequent to quarter, and <unk> and J. and J. worldwide services joint venture was awarded an eight year 190 million dollar contract to provide base operations support services.
At Naval Air Station Patuxent River.
As you can see in a year date award.
Our growth campaign is driving strong success.
These wind.
Together demonstrate ineffectiveness of our strategy and we expect additional wind from our approximately $1.4 billion in bid submitted and pending potential award.
Are backlog of 48 per cent sequentially to $4.1 billion or record high.
Grow some backlog supports our view of revenue growth and the rest of 2020 and beyond.
Given the strength of our business model, we are reiterating are 2020 guidance.
And are actively monitoring their covert 19 response and walk campfire phase in schedule.
Strategic priorities are unchanged and we continue to focus on achieving our objectives.
Please turn to slide four to discuss how we are meeting the challenge of covert 19.
Spectra serves critical infrastructure the networks that must continue to function to support ongoing missions that are critical to our national security.
As a matter of principle, we are doing everything we can do ensure our teams in clients health and safety.
Pandemic.
While respecting the law isn't protocols in every client environment in country, we operate.
Because of operation in South Korea picking it it became evident too early on that we were likely dealing with a pandemic and immediately began taking steps to ensure employee health and safety.
We leverage the Vectrus operations center, which monitors operations Prevatte, Chris around the globe to serve as a hub for efficiently flowing and updating protocol.
Safety information across a company.
Enable our people to best assess manage.
Circumstances, an individual locations as a crisis unfolded.
And shared best practices for safety and mission execution worldwide.
In addition, our people our meeting the challenges are the moment to serve our clients. For example, we are supporting the Air Force has offered during covert 19 to host basic military training recruit at key for Air Force base, which houses medical and Expeditionary training capabilities.
We successfully managed to third given coming <unk> keys for as part of the Air Force has efforts to spread out trading across basis.
Protector recruit and instructors from the virus.
Our fleet systems engineering team directly supported the Navy's deployment of the hospital ships Mercy and comfort to San Diego and New York City, respectively in the fight against covert 19.
<unk> R.S. setters rapidly delivered engineering expertise to provide secure and reliable.
Peer to ship connectivity, increasing bandwidth and improving communication to support the relief efforts.
In Kuwait to comply with the evolving host nations protocols are K. boss team developed a detailed critical essential mission support plan to move several hundred employees in two accommodations on military installations to ensure delivery on missions.
This demonstrates out control our teams Arctic clients missions continuity and success.
More than 13000 combine employees on partners of actress or on the front lines in support of our clients throughout the pandemic I cannot thank them enough for their professionalism and for remaining true to our our values and dedication to our clients missions now I would like to turn the call over to our Chief Financial Officer.
Susan Lynch to review our financial.
Thanks, Chuck and good afternoon, everyone talking with me now the slide five to discuss our first quarter results.
First quarter, 2020 revenue was $351.7 million up $25.8 million or 8% year on year.
Organic revenue growth was 4% year on year, excluding the contribution from advanced or which was acquired early in the third quarter of 2019.
Please report that we saw revenue growth in all geographic regions, driven by increase of $11.5 million from our middle East programs.
Increase up $10.1 million from U.S. programs, and an increase of $4.2 million from European programs.
Our revenue with the army grew 9%.
Air Force group, 8%.
And maybe revenue grew 1% error cables contract contributed $124 million or 35% of total revenue in the quarter.
Operating income for the first quarter, 2020 was $12.5 million or 3.5% margin compared to 3.2% margin in the first quarter of 2019.
Adjusted operating income for the first quarter of 2020 was $12.6 million for 3.6% margin.
The 3.5% and the first quarter of 2019.
Tested operating income increased $1.2 million year on year due to an increase in revenue and improved operating performance.
First quarter 2020 interest expense was $1.7 million up $128000 a year on year due to the pre emptive draw on the company's revolve or as a result of concerns around a covert 19 pandemic.
But just to even for the first quarter of 2020 was $14.6 million up 14% from last year.
Adjusted even <unk> margin was 4.2% 30 basis points from 3.9% and the first quarter of 2019.
Net income for the first quarter of 2020 was $8.7 million as compared to $7.1 million for the first quarter of 2019.
The effect of tax rate in the first quarters of 2020, and 2019 was 19.6% and 19.8% respectively.
Adjust the net income was $8.8 million up 11% compared to the prior year.
Diluted earnings per share for the first quarter of 2020 was 74 cents compared to 62 cents in the prior year.
I was just to the E.P.S. was 75 cents up 9% you're on here.
Our first quarter results were minimally impacted by covert 19, and we estimate that the impact of Cobin 19 in the first quarter was a decrease of approximately.
$2.2 million in revenue any negative too sensitive earnings per share.
Tour with me now the slide six to discuss cash liquidity.
That's cash provides from operate activities in the first quarter of 2020, with a positive $1.1 million and improvement of seven and a half million dollars as compared to the first quarter of 2019, driven by strong collections at the core.
Given the initial uncertainty associated with Kobe 19 in mid March we made the decision to preemptively draw $115 million on our revolver and to maintain that position across quarter in which the company has never done before.
As of today about half of that amount has been repaid with approximately $60 million currently outstanding.
Cash a quarter and was approximately $146.2 million total debt was $184 million a net debt was $37.8 million approximately flat to queue for 2019.
The company's total leverage ratio with 2.6 times and our net leverage ratio was 0.5 times.
Turnout a slide seven to discuss our backlog.
First quarter 2020 told backlog with approximately $4.1 billion, an increase of 48% and a record high for the company.
Total backup includes the receipt of extensions for cable decks Walker and awards on N.S.F., Devastatingly, Romania boss and log kept five task quarters.
Voted backlog with flat at $1.1 billion compared to the first quarter of 2019.
The company's trailing 12 month book to Bill ratio was 1.5 times are booked a bill increase substantially this quarter due to the receipt of a contract extension and the New awards I just mentioned.
Are large backlog is a unique attribute of our business and represents 2.7 times the midpoint of our 2024 year revenue guidance, providing visibility into the remainder of the year and beyond.
Let's move now the slide eight to discuss our 2020 guidance.
We are reiterating are full here 2020 guidance ranges for revenue, even <unk> to lose E.P.S., a net cash provided by operate activities.
We are currently S. mean that there could be in approximately 20 to 25 million dollar impact on revenue with a corresponding impact to operate income and the second quarter of 2020 as a result of Kobe 19.
We're working with our clients with regard to their Cobas 19 response, and Lolcat five facing schedule.
Facts or assumptions surrounding our guidance change we will update you accordingly.
The company is and will be differing in poor tax payments under the cares act into 2021 and 2022.
As a result operational cash flow will improve player <unk> $18 million.
Are 2020 games for operating cash flow has not incorporated this favorable payment deferral into our operating cash flow forecast for guidance.
I'd like to now turn the call back over to Chuck. Thank you.
Thank you Susan LS moved to slide nine to touch on Lolcat five.
March 3rd we received a notice to proceed from our client and began to transition to set the theater planning.
<unk> <unk> <unk> Vectrix was awarded as part of our position on log kept five.
You know the initial value of these task orders of approximately $1.4 billion or 40% of the 33.5 billion dollar total initial value of task quarter awarded to all seats.
To increase safety during the pandemic the D.O.D. restricted non mission essential travel and then issued a condition. The base transition plan that said key condition under which log kept five awardees may travel for site assessments.
Physical site visits are necessary to transition, particularly quad you want a toll and the Marshall Islands and some activities will wait until conditions are satisfied.
We expect to have a better understanding or transition time lines and the next 45 to 60 days.
With respect to the protest process three or four protest have been adjudicated, what the army's decision being upheld.
All other legal remedies have been exhausted for these protest only one protest remains active.
We believe the protested winding down and should be settled in the near term.
We are working diligently to deliver flawlessly another critical mission to the army.
Let's move dislike 10 to discuss our new business pipeline.
As mentioned to my earlier remarks are award activity remains salad with fourth quarter Winter Cross all D.O.D. clients. Additionally, we believe our pipeline of new business opportunity support continued growth and backlog and revenue.
We currently have approximately $1.4 billion on bid submitted for new business Oh Waiting award.
Which from a client mix perspective represents our focused growth campaigns are bid submitted a weighting award Doc from last quarter due primarily to log campfire task orders.
Being into backlog. Additionally, we have identified opportunity to $8.8 billion that we plan to bid over the next 12 months.
Well the timing of awards is difficult to predict we are competent in our ability to successfully compete for business.
In our approximately 10 billion dollar new business pipeline.
Let's move to slide 11 to discuss our strategic execution.
That Christmas transforming into a larger scale higher value differentiated platform by understanding our clients need to move from traditional ways of operating their facilities supply chains and networks to a much more instrumented and converged approach.
The strategy underlying this transformation centres around three core elements.
Enhance the foundation expand the portfolio and add more value.
The results, we have delivered in enhancing our portfolio and quiet mix.
The success of our campaigns and expanding share with our clients.
Teams talent inability to provide thought leadership.
That our capabilities are growing and our thesis is working.
Mentioned earlier part key 2020 to 2021 priorities against the backdrop of the pandemic and our dedication to the protection of our team and clients are viable and achievable.
Particularly true as the D.O.D. has already taken action to support the U.S. defense contracting community.
Riding guidance on managing covert 19 impacts on defense contracts, including contractual mechanism to to address cost.
<unk> and performance impacts and other actually to provide liquidity to federal contractors and their suppliers.
We appreciate the D.O.D. supported the defense industrial base.
And expect us to help alleviate any affects their program disrupt disruptions or other impacts from the pandemic.
Or media priority remains affecting a flawless walk out five transition.
Send calm and then <unk>.
Leveraging the investments we have made to support this growth and continuing to deploy capital on strategic M. in a an organic pursuits.
Further and 2020, we continue to implement enterprise Vectrus driving forward from 2019 expedited pace of this and other and turtle investments in order to enhance our capability and foundation to support our expectation of future volume growth.
Enterprise back Christmas planned to contribute to margin expansion through increased process discipline cost efficiency supply chain leverage and technology enhancements on both our programs and support functions.
The processes that were hard in 2019 are now expected to contribute to even a margin expansion in 2020.
We will continue to insert operational technologies into our new and existing programs as we take advantage of converged infrastructures.
She has advanced perimeter security and many other technology enabled solutions.
Our client focused centres on delivering seamlessly for the army.
Advancing are successful growth campaigned with the Air Force the Navy and the intelligence community, while leveraging our president's around the globe to build in to execute an international pipeline of opportunities.
And we will continue to explore opportunity to make strategic acquisitions to expand quietset and capabilities and to strengthen our leadership in that converged market.
Actress as a well capitalised business isn't it at advantageous position to Opportunistically acquire in the current environment.
2020 has brought challenges to our industry enter the entire world.
Vectrus purpose built to deliver and support infrastructures that are critical to ongoing missions during normal times and times of crisis.
Our job until the pandemic ease as if they continue to protect our people our clients and their missions, while staying focused on the opportunity to lead into converge marketplace.
I want you again, thank our teams further diligence in the face of increased University.
Yeah, they're continuing dedication to support of our servicemen and women in their critical missions around the world.
Now I'd like to turn the call open for questions.
Thank you at this time would be conducting a question and answer session. If you'd like to ask a question. Please press start one on your telephone keypad.
Formation Tome indicate your line is in the question Q. you May press start to feel like to remove your question from the queue.
Four participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment. Please why we polled for questions.
My first question comes some Chris Van Horn with B. Riley. Please proceed with your question.
Good afternoon, everyone. Thanks for taking my call and hope everyone's doing well.
Yeah in fact, Chris How're you.
Great. Thank you. So I just wondered if you could comment on the contract activity. You know you I know you mentioned 20 to 25 million impact to revenues is that do do deferrals of programs is there any cancellations that you're hearing and how the kind of real time.
Process for work is going.
No we're not seeing cancellations at all in fact, the demand basis strong the activities on the basis are continuing to Mount.
The realities are that there is limited access.
The various spaces, we do anticipate when we began to move back to more normal crewing, Yeah, we'll have an opportunity to claw that to call that revenue back.
Hmm.
Okay got it and you know from a competitive standpoint are you seeing any change in the competitive landscape due to this you know the small disruption is there.
The smaller competitors are they not showing up and you know anything from a competitive perspective.
Not really we continue to <unk> to see strong demand in the marketplace. Our clients are continuing to issue proposal. We continue to respond and as you saw from the prepared remarks, we are continuing to receive our fair share of awards.
Got it.
And then you know you've been able to you know.
Keep your costs, you know under control, especially in yesterday wine as you have you don't have as you increase these bids plan to submit do you need to invest further in S.G.A. or do you think your your your right sized where you are now.
As we talked quite a bit last year, we've made.
Continue to make investments in our business.
As our business continues to grow we're creating more operating leverage in providing us additional opportunities to invest so yeah. Just point in time I I really like where we are we're in the middle of.
Implementing I knew enterprise systems that we talked about for the last couple of years.
And again, we're just stuck continuing to work with our clients to get log cap transition.
Continued to expand our revenue base and capabilities accordingly.
Okay got it I'll pass it along thank you so much the time and stay safe unhealthy.
Thank you same view thanks for the questions.
Our next question comes from Joe Gomez with Noble capital pleased to see with your question.
Good afternoon, congrats on the quarter, thanks for taking my questions.
Thank you Joe.
This real quick the log cabin protests all my thought last time, we spoke to the expectation was it that was going to be wound up in in April as this delay kind of coal read related or something else. That's that's come up that.
<unk> has pushed this date out.
No and after that say a ethic. That's a good question. So three of the four protest have been adjudicated and the time frame for though three protest to to appeal has passed.
<unk> protest is tied up and I'll call administratively.
The judge assigned to the case has been.
It has been required to focus on other non protests related activities.
And so as soon as he can get back to his docket.
We would we would assume that protest would would proceed and again <unk> indicated to my prepared remarks I do believe that we're in the kind of the end stages of the process.
Okay great.
On the on Dec any timing is to win that won't be awarded.
It continues to push a bit to the right I I don't know that I would say that it's a code related or not.
So we we do do not have a timeframe. We are continuing as you saw and the prepared remarks to process project extensions, which we always like obviously.
But I would assume that it would be in the 2021 at this point in time, but again I don't want to.
I don't want to project anything that that's not official.
Okay.
[noise] I <unk> I, you know you see where you you discussed in the in the second quarter, probably having it 20 $25 million impact on revenue.
In the first quarter, specifically and then I guess, you know someone into the second I mean it.
You had to assume additional expenses cobin related and if so you know how how is that.
Impacted you know margins just at all.
No. We we worked very closely with our clients and as I've indicated and I prepared remarks that our clients are doing a phenomenal job working with us and the entire industrial base to make sure that we can keep up contracts the line to operating realities and cost a line.
Revenue so at this point in time.
That reduction in revenue is predominantly related two based access the workload is continuing to grow and we fully expect once we get back to more normal crewing on our particular contracts that you know we're going to work with.
Clients to claw as much of that work load back as possible because again it is existing demand that demand is currently funded and the work is still required.
Okay and one last one for me I don't in the the fourth quarter. Your Guy fourth quarter call you talk about their would bend, some delays and cast collections, but that had been resolved.
Q1, given what's going on here now any.
Particular negative impact on cash collections.
As you've seen in the first quarter, it or so far gear into the second quarter.
Again, I mean, there there are complexities out there so I don't want to minimize the complexities, but our clients are very actively working with herself him for that matter everybody on the industrial base and so.
Susan unless you've seen something I haven't I I think we should still continue to see the pace of then voices a collection that we have historically, saying yeah I agree our customers have been.
Bending over backwards to work with us and to make sure that.
Yeah, they're working with the industrial base to make sure that you were there to support them.
That's good news thanks for taking the questions of congratulation.
Appreciate it thank you for the call.
Our next question comes from Joe Denardi with Stiefel. Please proceed with your question.
Hey, Chuck's who's in this is John Freak show good evening.
How are you.
Doing well first question Chuck I want you the kind of put on your your your prognostication hat and 'cause kind of talk to us about how you see the outbreak changing the customers approach to the converge infrastructure is this going to accelerate.
Demand for this is this going to.
You know maybe be a limit how are you guys approaching.
The the outbreak relative to your converged infrastructure outlook.
Oh first of all the the safety of of our employees of our contractors our clients.
Remain Paramount I do see that as we continue to move forward.
With the operating procedures that have been put in place over the last several months, we may actually see an opportunity to provide additional ways to insert technology and and keep people. If you will off of you know front line, where they may not need to be so.
It's it's a a I sit insightful question. It's questions that we continue to oppose do our clients and as you know as any industry transform that converges overtime.
You know there are there are.
Certain events that May a time, you know cause the activity to be move along a bit quicker. So I don't want to <unk> I don't want to project that to happen, but there certainly is an opportunity for us to work at new and different ways.
To keep not only are people safe put our clients safe as well.
You know your competitors have had different.
Color on the awards environment.
Is there anything you can share about what you see with some of your key <unk> customers. It's proven since Oh. The army has been awarding work versus the navy or the airports.
Oh, we actually see a very consistent OPTEMPO, if you will across our clients that the you know we are very purpose built.
To do what we do we operate military facilities networks, an I.T. network and I.T. networks and you know that business is you know quite stable and and in demand.
So we see again, a good OPTEMPO on the part of our clients.
I think the vessel. Lou example, the recent award is a really good example that the client work.
Very hard with us to find innovative ways to safely all stress safely.
Yeah at our people at the where are they needed to be to conduct site surveys and so forth. So.
Again, I think their responses been even I think our clients are prudently working with the industrial base to make sure that we can continue.
To advance the various missions that we read the been awarded for indoor currently operating.
Okay and then just one last question Chuck when you guys look out at the current.
I'm an environment I presume you guys aren't necessarily getting ready to go out there and and make any acquisitions, but is this providing you an opportunity to maybe reassess the marketplace and <unk> grab too worth considering.
As maybe three months ago.
Well, we have and we continue to actively a sense to assess M.A. opportunities and again as I've indicated on multiple occasions, we're not in the I'm in a business for a scale. We're in the emanate business to both expand our client.
Capabilities.
So as opportunities arise as opportunities are arising we believe are going to create economic value for <unk>. We're always we're always assessing those opportunities and when the right things you know are presented to us that we move so.
Again, obviously, we have a different backdrop and we understand that backdrop.
We also have mentioned in my prepared remarks remain very focused focused on the execution of our strategy.
I, Thank you very much and great quarter.
Thank you we appreciate it.
We have reached the end of the question and answer session. At this time I'd like to turn a call back over to Chuck Pro Vectrus, President and Chief Executive Officer for closing comments.
Thank you very much and thank you for joining the call today, we've enjoyed it it's a a interesting environment outdoors. So please stay safe and we look forward to talking to you at the end of the next quarter.
Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Today's conference call has ended please disconnect your lines. Thank you.