Q3 2020 Vectrus Inc Earnings Call
My name is Robin I'll be the operator for today's call.
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Now I'll pass the call over to your host Mike Smith, Vice President of Treasury, and Investor Relations and corporate development that's actress.
Thank you good afternoon, everyone welcome to the Vectrus third quarter 2020, <unk> earnings Conference call.
Joining us today are <unk>, President and Chief Executive Officer, and Susan lunch dinner.
President and Chief Financial Officer.
Slides for today's presentation are available on our Investor Relations website, <unk> Dot Vectrus dot com.
Please turn to slide two.
During today's presentation.
Making forward looking statements pursuant to the safe Harbor provisions of the Federal Securities Law.
Please review our Safe Harbor statement in our press release and presentation materials for Christian and some of the factors 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.
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.
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Our 10-Q.
At this time I'd like to turn the call over to Chuck.
Thank you Mike Good afternoon, everyone. Thank you for joining us on the call today Tomorrow November 11th and Veterans day 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 at Department support many of our clients critical missions.
Often times in remote and austere environment.
Thank you for all you do for our nation and for our company.
Turning to slide three our performance in the third quarter with solid with our financial results, reflecting strong revenue and profit ethics.
As expected <unk> T 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%, but one of the highest on record for Vectrus.
Yeah, well the press up considering the estimated 40 basis point impact from cobot 19th.
Adjusted EPS was 89 cents and absorbed at an estimated 14 cents impact from the COVID-19 departure.
During the quarter, we continued to execute well on our growth strategy, both with respect to our client growth campaign, and our expanded capabilities have converged infrastructure provider.
The Vectrus team recently achieved a strategic milestone it was awarded a prime contract for the Navy Smart warehouse prototype Fiveg applications.
Contract relates to the D. fiveg experimentation and testing at five U.S. military test sites.
Strategically significant for several reasons.
Well, we have received awards for our technology capabilities. This is a testament to our clients migration toward their converged infrastructure market sector.
Second it represents the largest full scale fiveg tests for dual use applications in the world After a third.
What I've been doing additional competitive arena focused on technological solutions that are now being applied within the traditional boss and IP services.
The D.O.D. had earmarked $600 million among all contractor and test site for this initiative.
Well provide industry, leading inventory management.
Network security robotic material, moving and environmental sensing capabilities that enable pay San Diego.
The warrants as a result of our deliberate strategic investments to expand our capability to help our clients move from a traditional way of operating their facilities supply chain and networks to a much more instrumented and converged approach I want to congratulate our teams for this achievement.
Were also recently awarded a position on the best in Class General Services Administration multiple award contract indefinite delivery indefinite quantity vehicle also known as the way says.
Let's see a couple provides integrated professional services for our government customers worldwide.
This award demonstrates our increased capability to function at a private caught contractor and large scale IP as well as our traditional markets.
This award would not have been possible without the contribution of capabilities contract and performance uptake.
Our acquisitions over the last three years.
Yes, I'd ask you about factoring 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 that 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 1.5 times with.
With respect to walk you have five we continue to phase in operations and transition.
New contracts and task orders.
Be it at a slower pace due to COVID-19 related travel and base restrictions.
As we discussed in our last call. The original walk Cadfive hundred 80, they transition phase in period had been elongated as a result of the global pandemic we.
We anticipate full operational capability I walk out five task, where we haven't come and say by mid next year well kept bypass that represent new scope are also progressing but at a far pace we.
We continue to be actively engaged with our clients and every seat new task orders and are evaluating others in both <unk> and Endo Peco. Although these new task are smaller in size. They represent a strategically important missions that provide a foundation for future growth.
Further we continue to see demand from clients outside the army to utilize lot kept by program to support their critical mission requirements.
Given the year to date core 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 after 2021 or first quarter.
Continued execution and delivery on all of our programs, while keeping our teams and our client safe under COVID-19 conditions.
Further expanding our pipeline of opportunities in both converged at traditional markets and third continuing to pursue M&A that supports our strategy of expanding our capabilities and client base.
Please turn to slide four to touch on our notable contract wins.
During the course of 2020 metric received over $2 billion in award by delivering exceptional program performance to our clients invest.
Investing in our people and our capability 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 back Chris one of $196 million five year Recompete contract to continue based operational support at Naval station onetime obey in Cuba.
Initial two year award of this outcome based contract in late 2018, but an important strategic went for Vectrus that kicked off our navy growth campaign, which in aggregate equates to over half a billion dollars of wins not including wins of approximately $350 million you our new joint ventures.
The award is currently under protest and we look forward to providing even better client outcome or with a new five year period of performance.
You know pick I'm award under a lot of Cadfive have strongly positioned us for additional work in that region across our client portfolio. For example, during the third quarter, we want a 5 million dollar task order under the naval.
Well, we'll continue to see service at multiple award contract you provide operation support services at United States Army Reserve at several locations and then they'll pick up. Additionally.
Additionally, as we discussed with you on our last call. We were awarded a $529 million modification or <unk> program that extends the contract from September 2020 through September 2021 to support the transition of lot kept by Satcom task order yeah.
Again important to note that only half of the award value was currently included in our backlog.
Let's move to slide five to discuss our new business pipeline.
A protest 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 year over year with a $1.7 billion of submitted bids at $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 a waste.
Yeah. This contract was not previously accessible to Vectrus.
I remain confident that vectrus well continue to win its fair share of new opportunities.
Please turn to slide six where I will discuss our alignment to the mission critical areas of the DRD budget.
Over 90% of the work Vectrus performed as funded from the D. operations, a maintenance funding source.
Which as you can see in this graph on the left have been resilient through various economic and political cycle.
Yeah that is instrumental in maintaining readiness for the department of defense.
Additionally, as a leading provider of facility support services to the D.O.D.. We believe the base operation that facility Sustainment budget, which makes up over $40 billion of that $290 billion in operations and maintenance, it's particularly relevant to vectrus.
It's fun they get necessary to keep facilities in working order by 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 the DRD mission essential operations and readiness and the Vectrus is well positioned to continue to grow in this area regardless.
A broader economic or political chefs. Furthermore, while it is important to acknowledge and understand deo de spending and the budgetary out fuck.
As it pertains to Vectrus, we continue to see prospects for future growth within our current DRD clients set as well as the expansion to other federal whatnot federal domain, but importantly, a significant opportunity to expand beyond 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 sort with me now to slide seven 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 that were approximately $12.9 million due to the COVID-19 pandemic.
Most of the revenue impact with high margin work the customers delayed due to limited base access and social distancing restrictions rather.
Revenue increased sequentially $16.4 million or 4.9%, that's several bases eastern access restrictions and develop returned to work plans.
Adjusted EBITDA was $17 million in Marjah, 4.8%, representing the second highest margin rate in the past 10 quarters. This.
This is an impressive accomplishment as EBITDA margin includes an estimated 40 basis points of COVID-19 M. path.
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 $900000 roughly half of them 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 89 cents 18 cents higher than the same period last year.
Yes, and adjusted EPS were adversely impacted by the deferral of high margin work due to the COVID-19 pandemic, which is estimated at 14 cents of EPS for the quarter.
Turn with me now to slide eight to discuss our backlog.
Total backlog is $3.7 billion, which represents a trailing 12 month book to Bill ratio of 1.5 times, including the Naval station Guantanamo Bay Award, which is currently under protest or pro forma total backlog was $3.9 billion.
Our armed back program contributed $158 million or revenue during the first nine 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 a word to vectrus the value of your work with significantly add to our backlog and increased our book to bill ratios substantially.
Turn now to slide nine.
Year to date cash provided by operating activities was $37.7 million, which includes an estimated 10 million dollar benefit from the carriers Act.
Actually ended at $63.7 million as compared to the third quarter of 2019 up $41.1 million net.
No that was close to zero at $2.3 million a reduction to prior year of nearly $30 million. The company's leverage ratio was <unk> 0.99 times and liquidity, including cash on hand, and the Undrawn revolver was more than $180 million, our strong liquidity and low leverage.
Missions as 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 remained unchanged.
On our Q3 2020 result, we now believe that our full year performance shouldn't be in the mid to high end of the range with cash in the low to mid range as a result, a customer delays in reimbursement for Cobra 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 that by focusing on a consistent execution and our commitment to our clients missions.
We achieved a strategic milestone in <unk> <unk> and our converged infrastructure market award, putting vectrus on the shortlist of capable providers as this market take shape.
Our talent to grow team continue to run our organic growth engine smoothly aggressively driving our client tailored campaigns to logcap contract and presence and Endo paycom. They are already adds to our organic growth opportunities. We have a strong backlog it represents more than 2.5 times.
The midpoint of our 2020 revenue guidance.
The high free cash flow characteristics of our business and strong balance sheet was essentially zero net debt provides the ability to make acquisitions that align with our strategy ought to take a moment to thank our entire workforce for their continued dedication fortitude and resourcefulness everyday as we face the ongoing global patent.
Like our team remained determined yet flexible regardless of remote and austere operating environment, maintaining a high level of operational readiness for our clients.
Navigating host nation, and they specific requirements and risk and restrictions have been complex and fluid and our people continued to deliver.
Now I'd like to turn the call back over to the operator.
Thank you at this time I will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you and our first question is from the line of Joe Coalesce with Noble capital. Please proceed with your questions.
Thank you nice quarter.
Thank you.
Real quick on back you know that we've.
We've kind of supposed to be doing far awarded here you know.
For six 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 our announced the award.
No no. It's a large award as you know and we don't read anything into the into the specific timing. So we do expect to hear on the on deck Recompete sometime this year still Oh, we continue to receive extensions and the field in 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.
The new business pipeline. So if I look I think yeah, I compare that to work near the numbers were for the second quarter and then second quarter you had a total of 10.6 million now we're at a 10 billion.
[noise] <unk> you know the the bid submitted went from 1.1 to 1.7 Bucks.
Our our problem, Yeah, and then the plants at summit.
<unk> went down off a little bit I'm, just trying to figure out what what is going on there that would drive the number the overall number down sequentially.
As we mentioned last quarter that the volume of bids are being submitted was very high it's high today. So I don't I don't read anything into that other than the fact that the the pipeline is robust our new business teams are working very hard so I think we have plenty.
Have a plenty of pipeline to yield the types of yields that we need for a for 21 and beyond so short answer to your question I don't read anything into it the tempo stays very high and quite frankly, I like a lot the types of things that we're bidding there more aligned with the converged.
Infrastructure opportunities that we had been anticipating and that we now see emerging in our pipeline.
Okay. One last one from me you mentioned in your prepared remarks that you've been seeing some demand from clients outside the army to use Logcap I just wonder if you provide just a little more color or detail on that.
Sure in the Endo pay com area of operation in particular.
The Navy is the predominant service and we're working with our navy clients to understand of that contract vehicle.
Building some bridges between the Navy and the army.
And we really like the shape of the Oh.
Emerging navy opportunity that could potentially use a lot of cap contract as well.
We have other contracts that we recently won and it will take time 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 that we did not have that type of presence.
Great. Thank you much.
Thanks for calling in thanks for the compliment.
Thank you as a reminder, we press star one to ask a question.
The next question comes from the line of Joe Denardi with Stifel. Please proceed with your question.
Good evening Hi, this is John on for Joe Good quarter everyone.
Thank you.
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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.
Coated one off with SGN, a orkin does this have legs be on 2020, and we can see SGN they kind of come down over the next year to two years. If you guys can just give us the puts and takes around how you're thinking about margins going forward and the age of coal that I'd appreciate it.
Yeah. So this is Susan I'll actually jump in there and and Chuck can fill in where I Miss as Weve 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 you know processes that are customer facing like work order management and so and then we've even done things like working capital you know improving our Dsos, you know et cetera, and I 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 you know into the out years, you know that we have this goal of you're achieving two and a half a billion dollars in revenue by 2023 and 7%.
The EBITDA margin.
And so that has always been one of the tools in our tool chest was you know enterprise vectrus.
The second thing is you know the reason why we've shifted and tried to shift some of our portfolio into fixed price programs is as we get better at delivering those programs. There is a higher margin.
Favorable to the company and I think you're seeing all that come come together you know, we're just constantly as we sit back and take a look at the quarter you know 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 that our customers.
How will that that we weren't able to you know actually include that in our results. It is still in a major amazing margin that we have for the quarter Chuck.
Oh, well done and a from.
From the time that we announced our past the two and a half in seven I've always said that you know getting a second 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 I'd like to think that that's what we're beginning to see so more to come I won't we'll track. This obviously.
Every quarter, but I would like to thank our team for all their hard work that allowed us to to generate this result, and thanks for the question.
Thank you at this time, we've reached end of our question and answer session I will now turn the call over to Chuck Pro 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.
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.