Q2 2020 Vectrus Inc Earnings Call

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.

At this time, all participants have been placed under listen only mode. Following management's presentation I will open up the coal for acumen a session instructions will be given at that time.

And now I'll pass the call up to your host Mike Smith, Vice President of Investor Relations and corporate development at that Chris. Thank you you may begin.

Thank you.

Good afternoon, everyone welcome to the Doctor second quarter 2020, <unk> earnings Conference call.

Joining us today, a truck growth President and Chief Executive Officer.

The lunch senior Vice President and Chief Financial Officer.

For today's presentation are available on our Investor Relations website investors that's actress dotcom.

We started to fly to.

During today's presentation management will be making forward looking statements pursuant to the safe Harbor provisions of the Federal Securities Law.

Please review our safe Harbor statements in our press release and presentation material for a description of some of the factors that may cause actual results to differ materially fund results contemplated by these forward looking statement.

The company's there's no obligation to update its forward looking statement.

Additionally, I would like to point out that we'll be discussing and reporting adjusted non-GAAP metrics, including adjusted operating income margin adjusted EBITDA and margin adjusted net income 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 call over to truck broker.

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 in cash flow EBITDA and earnings were adversely impacted by factors that I will explain shortly however, mcafee main stronger than ever and is expected to achieve meaningful EPS growth in the second half a year.

By the backdrop of Cobot 19.

Please turn to fly three to discuss our financial results.

Revenue in the second quarter increased slightly from last year.

We estimate the cobot 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 zero net debt today, and our strong cash flow profile or 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, an EPS were affected by a contract adjustment to a European program onetime close out.

And cobot 19 impacts.

We'll discuss the contract and contract close out adjustments in greater detail in a moment.

Our adjusted EBITDA margin in the second quarter with 2%.

I previously mentioned adjustments adversely impacted margins by 240 basis points.

Regarding covert 19, the deferral of higher margin revenue had a disproportionate 30 basis point impact on margin.

Adjusted EPS of 24 cents was adversely impacted by 54 cents due to the previously mentioned adjustments.

In addition, we estimate the covert 19 had a 14 cents impact on adjusted EPS.

Our GAAP EPS was also affected by M&A costs and Logcap five pre operational legal cost a 14 cents.

Well these challenges affected the quarter's profitability our growth engine continues to execute well and we were successful in winning significant new business in the quarter.

Perfectly our Navy growth campaign went over $550 million a new programs. We also expect additional wins for more approximately $1.1 billion in bid submitted and pending potential award.

Backlog grew 18% year over year to $3.8 billion at the end of the second quarter.

With respect to lock have five transition to start up activities are proceeding, but at a slower pace because of Kobin 19 related based access and hosts nation restrictions.

The original walk kept five 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 five until 2021.

With that being the case, we remain actively engaged with our clients and are already seeing additional task order for work associated with that program.

So well walk Hep has historically been an army century 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 dollar modification. The K BOSSS program that extends the contract from steps up from September 2020 through September 2021 to support the transition into our Logcap five Centcom task order.

Our priority for the second half of the year include continued seamless logcap pipe transition.

Ensuring program execution and delivery, while keeping our teams and our client safe during covert 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 covert 19 on existing programs, including this impact on transition of Logcap five and newly won program.

Both coasts nation and based access continued to be a gating factor to full operational capability.

We estimate koeppen 19 will impact revenue and EPS by $40 million.13, and the second half. Additionally, protest on new business awards are limiting our ability to conduct transition and phase and activities.

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

Now I will go through the factor that impacted our QQ result, and full year guidance.

Please turn to slide four.

The second quarter, we realized the contract adjustment to a European program, which had a 36 that adverse impact on E. P. S.

For a number of reasons, both volume and cost the outcome based contract is it a lot position. The company is working with the client to resolve this it this issue prior to the next option period in mid 2021.

Importantly, the rest of world portfolio continues to operate and perform well have remained on track with plan.

During the second quarter earnings were also impacted by 18 cents due to onetime adjustments associated with contract Closeouts contract adjustment and government fiscal year close out.

That could have 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 automate.

During our core program and support processes.

Part of this effort includes the implementation of our modernized enterprise I T platform.

Several aspects of which are operational and is scheduled to be completed in the first half of 2021.

Please turn to fly five to touch on our notable contract wins.

We continue to make investments in growth focus talent and capabilities that support differentiation and are yielding growth.

Through the second quarter Vectrus have received $1.7 billion, an award 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 eight year 210 million dollar firm fixed price contract to provide base operation support to Isa Air base in Bahrain.

Also as we discussed last quarter, our new joint venture was awarded an eight year 190 million dollar contract to provide based operation support services.

Yeah Naval station Patuxet River and finally, the same joint joint venture with awarded a seven year 154 million dollar 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 they went well not material will not be material to 2020 result, and will primarily begin contributing and 2021.

Additionally, we were awarded US strategically important five year fixed price I'd like you could provide intrusion detection system supplies hardware and services at Edwards Air Force Base. This award was due to our position as a leading provider integrated electronic security systems.

And the investments that operational technology to innovate and lead in the emerging converged infrastructure market.

Now, let's turn to slide six to discuss our backlog.

As I discussed in the previous Slide our award activity remains strong total backlog at $3.8 billion and subsequent to the quarter and our total pro forma backlog is $4 billion.

The company's trailing 12 month book to Bill ratio would equate to 1.6 times based on a 4 billion dollar pro forma backlog taking into consideration part of the recent recent K BOSSS modification. Our three Navy awards that are under protest and for the obligation associated with a subcontract which isn't.

Now expected to be performed by the prime contractor.

Additionally regarding on Dec program. The contract is currently funded through August 28, 2020, and we have been notified that the contract will be extended for another six months.

In terms of size as a reference I'm that contributed $109 million at revenue during the first six months of the year. We believe the extension will be similar in size and adding to backlog once issued our backlog of the unique attributes of our business and represents 2.7 times 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 seven to discuss our new business pipeline.

Our new business when rates remain solid and I remain confident that our pipeline of new business opportunity supports continued growth in backlog in revenue.

Our pipeline of opportunities continue to increase and at approaching $11 billion.

Which consists of $1.1 billion, a bids that had been submitted and awaiting award. Additionally, we have qualified new business opportunities valued at $9.5 billion that we plan to submit on bid in the next 12 months.

As a result of the global pandemic contract extensions are becoming more prevalent and could shift some of the procurement awards to the right.

However, given our backlog and recent award we believe factories is still on a solid position to grow.

Please turn to slide eight where I will discuss how we are well aligned to mission critical areas of video de budget.

Regarding the federal spending environment, and our department of defense clients funding position. It is important to understand that over 90% of the work Becker's performs it's funded from the DRD operations, a maintenance funding source, which as you can see again the graph in the upper left has been resilient through various economic and political.

Cycle and instrumental to maintaining DLD readiness. Additionally, as a leading provider of facility support services to D.. We believe the base operations at facility Sustainment budget, which makes up over $40 billion of the $290 billion and own EM is particularly relevant to vet.

Chris.

This funding as necessary to keep facilities and working order, while providing personnel and infrastructure support to sustain mission capability and quality of life.

We believe this funding is vital to deal with the mission of central 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 analogous to understand de 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 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 DRD clients that as well as the expansion into other federal and Nonfederal domain, but importantly, a significant opportunity to expand via the delivery of higher valued converged solutions and capabilities now I'd like to turn.

The call over to our Chief Financial Officer, Susan Lynch for a review of the financial.

Thanks, Chuck and good afternoon, everyone turn with me now to slide nine 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 cobot 19 pandemic.

Most of the revenue impact with high margin work the customers delayed due to limited based access issues.

In addition, the company had one time 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 cables 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 Kobin 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 I.

Adjusted diluted EPS was 24 cents as compared to 74 cents last year.

EPS was the virtually impacted by 14 cents due to cope with 19 and 54 cents related to the previously mentioned adjustment.

Turning now to slide 10 to discuss our liquidity.

Your day cash provided by operating activities was $34.4 million and include a 13 million dollar benefit from the carriers Act.

Cash ended at $62.7 million as compared to the ended the second quarter of 2019 of $70.3 million.

Net debt was $4.8 million inline with prior year, the company's leverage ratio was 1.08 times 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 law cadfive and newly awarded programs, which have slowed due to de cobot 19 related guidance and travel restrictions.

Additionally, delays in protest 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 would be in the range of 697 million to $717 million.

We have estimate a 40 million dollar impact from cobot 19 in the second half.

We're 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 plant a safe returned to work and why the Kobin 19 pandemic.

Due to the change in volume that I've discussed we have initiated actions to a line indirect costs and SGN eight accordingly.

Adjusted EBITDA margin will be in the range of 4.8% to 5.0%.

We've estimated approximately $2 million of adjusted EBITDA impact from Cobot, 19, and our guidance for the second half of the year.

Adjusted diluted EPS will be in the range of $1.70 cents to $1.84 cents per share.

They all look for net cash from operations is 10.6 million to $20.6 million, which includes approximately $1 million from the carriers 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 dollar impact from cobot 19.

We're 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, an 82 cents per share taking into consideration first half actual and a 22 cents impact from cobot 19 expected deferrals protest 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'd like to thank our people and summarize the prospects for our future.

I'd like to acknowledge the dedication and innovation that our entire workforce a demonstrated throughout the ongoing global pandemic, our workforce, many times operating and remote and austere environment had gone above and beyond to keep the mission we operate at a higher 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 have 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 2.7 times the midpoint of our 2020 revenue guidance the logcap contract affords vectrus access to the Endo.

Paycom AOR and as evidenced by our growing pipeline bode well for the future cash performance remained strong and our clean balance sheet essentially zero 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 with real but so as a 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.

Hi, good 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 off two questions operator.

Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Confirmation dome indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q4 participants use and speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment. Please why we poll for questions.

Our first question comes from Joseph Denardi with Stifel. Please proceed with your question.

Hey, good evening everybody.

Chuck can you just talk a little bit were about the contract yards or just kind of what contributed to with what what if any lessons learned and then or does that influence.

21, 22 earnings power at all well, what's the what's the margin impact of it going forward. Thanks, Yeah sure the European context contract that we.

Discussed was a and outcome based contract where we really had a disconnect between both volume and cost.

The charges that we've taken this quarter in compliance with all the accounting regulations really takes a through.

The loss associated to the midpoint of next year.

We are aggressively working with our client on this.

Big 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 the final charge with regard to the 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 that kind of the magnitude into the opportunity and then now that you're I.

I guess into that contract a little bit recognize that is getting pushed to the right. But can you talk with anymore specificity around what the revenue opportunities from Logcap could be what's your fully ramped on that.

Sure we're going to talk 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 too.

A number of task orders predominantly in the Endo Paycom AOR, ranging from Thailand to Korea to two 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 side.

Man signal on what we would expect to see.

As as Logcap five continues to mature.

Okay, and then maybe a question for Sue win.

Look at the Green bar on on slide seven.

What is there a point in the next couple of quarters, when when a greater portion of that becomes green and they're larger contracts in the near term that you.

Plan to submit or does that stay relatively steady going forward.

Yeah on the <unk> make sure you're on the on the pipeline chart correct.

That's correct, yes, I'm just trying to understand if there are any larger pursued that are that are in the pipeline that you'll that you will submit bids for in the near term so kind of more of the pipeline.

It's kind of pending award rather than rather than not.

What we have seen because thats about a year out we have seen the bids pending.

[noise] evaluation by our clients to be.

You know somewhere between the one and $2 billion range.

There could be situation I don't anticipate is in the short term.

Where that could increase but I, if 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.

We are very very pleased in satisfied.

With our win rates and we believe that though when rates are at least industry average if not if not quite a bit more.

Okay. Thank you.

Thanks, Joe.

Our next question comes from a Joe Gomes with Noble capital. Please proceed with your question.

Good afternoon.

Just a how're you.

Doing well here.

Just real quick.

On.

The whole Covidien here, obviously, you talked about you know some of the.

Contracts that you want being pushed to the right.

Are you seeing any slowed down and RF keys.

From from key customers also being pushed further and further to the right all due to.

Cobot.

You know you know it's interesting in as it relates to the to the other Joes question a minute ago.

The the rate and pace of RFP that we are responding to continues to be breakneck. It really have 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 have Ur cobot 19.

Reasons for that occurring I will tell you that during the height of that pandemic and this was not in our prepared remarks, we did successfully transition into the vessel Lou which are the win from a few quarters ago, which we've talked about a few quarters ago.

So there is progress.

But but by and large the ability to access hosts nations.

And the ability to access the individual basis.

I have seen an impact from Cove, it and we really expect.

To see those impacts until we have.

He either a treatment Andorra vaccine.

Okay.

And and you're mentioning here you know some charges.

Not much chart for M&A related.

Just wondering might you have a little more color or do you feel that maybe a little update on on how the M&A pipeline is looking these days.

So Joe this is season. So we actually you know when the Kobe <unk> pandemic came out there was pretty much a drying up of the M&A pipeline I think a lot of deals were pulled I'm just because you know the valuations were going to be dropped accordingly.

Yeah, we did pursue a target acquisition during the quarter that with strategic you know not all acquisitions you pursue you know come to fruition and you know just when we actually you decided against and so you know the M&A pipeline has a refi.

Filled itself, there's actually a number of you know targets that were looking at.

And we'll be looking at a number of them you know very closely and hopefully there'll be one that will be a match for us at the right price.

Okay. Thank you much.

You bet right you haven't I say thank you.

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

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

Thank you very much.

This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.