Q2 2021 Vectrus Inc Earnings Call
[music].
Greetings, ladies and gentlemen, thank you for joining us for the vectors for second quarter 2021 and earnings conference call and webcast. Today's call is being recorded my name is John and I'll be your operator for today's call at the.
This time, all participants have been placed in a listen only mode. Following managements presentation I will open up the call for a Q&A session. You May press star 1 on your telephone keypad, if you'd like to ask the question.
If anyone should require operator assistance you May press Star zero.
And now I'll pass the call over to your host Mike Smith, Vice President of Treasury, and corporate development and Investor Relations and vectors.
Thank you good.
Good afternoon, everyone welcome to the vector of second quarter of 2021 earnings Conference call. Joining us today are Chuck Crow, President and Chief Executive Officer, and Susan Lynch, Senior Vice President and Chief Financial Officer slides.
Slides for today's presentation are available on our Investor Relations website investors got Vectra and Dot com.
Please turn to slide 2.
During today's presentation management will be making forward looking statements pursuant to the safe Harbor provision of the federal Securities laws.
Please review, our safe Harbor statements and 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, including 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 would like to turn the call over to Chuck Crow.
Thank you Mike and good afternoon, everyone. Thank you for joining us on the call today.
Please turn to slide 3.
I am pleased to announce that our business continues to advance on all fronts, resulting in a very solid second quarter the.
The success wouldn't be possible without the innovation and dedication of our employees, who stand with our clients across the globe and support of their most critical missions.
We continue to build on our first quarter momentum with revenue, increasing 40% year over year 2 of $471 million and.
And all time high for Vectra, if we grew organically, 21% driven by new business base expansion and face and our top line strength was matched by a significant increase in EBITDA margin to 5.6% the <unk>.
Combination of increased revenue and strong margin performance and the quarter yielded adjusted diluted earnings per share of $1.52.
And the second quarter, we were issued of Logcap 5 task order to support of major client exercise and the endo pay com.
Known as defender Pacific 'twenty, 1 this exercise of the illustrative of the rapid response and quick turnaround requirements that we expect to see over the next decade under the Logcap 5 contract, we expect our momentum and the Pacific to continue to grow and if we phase and Kwajalein task order and become fully operational.
In mid 2022. Additionally.
Additionally, we achieved 2 major milestones during the second quarter successfully transitioning both Iraq, and Kuwait task orders and reaching full operational capability.
I'd like to think of our team for their significant contributions and challenging environments to ensure client success.
We look forward to serving as the army preferred source for our logistics and base operations support and Sustainment services and satcom over the next several years.
We ended the quarter with total backlog of approximately $5 billion and pro forma backlog of $5.3 billion.
With regard to our armed ex Walker, our Recompete win our client have lifted the stop work order and we have started performing on the new contract. The <unk> Award is included and our total backlog of 1 protest and the court of Federal claims remains on index Walker.
Because of our strong year to date results and backlog, we are increasing our 2021 and revenue and EPS guidance. Please turn to slide for.
The vectors continues to execute our strategic framework, which is driving improved performance and growth across the business and positioning us to lead and the converged market.
Our momentum is being advanced by our growth and capital allocation model, which is focused on investing and organic growth targeted M&A and developing and inserting operational technologies aligned with our strategy.
The growth generated from this dimension of our model Leverages, our enterprise of vectors performance improvement initiatives, which are increasing value by automating our core program and support processes.
Cost efficiencies supply chain and technical enhancements to modernize our programs and support functions.
The foundational aspect of this framework that catalyzes and connects all of our efforts together as our team and cultural development initiatives. The people of vector of have been and continue to be pivotal to our success, we utilize our leadership development framework to grow the talent base. Additionally.
Vectra is value based culture is tightly coupled with our demonstrated focus on corporate social responsibility.
<unk> equity and inclusion.
<unk> of the majority of minority company with approximately 60% of our work force representing people of color.
The veteran diversity equity and inclusion council.
Employee resource groups and D day, Eni town halls, and leadership summit for our employees are central to our culture and management system.
These components of our value system and strategic framework are enabling vectors to deliver on our strategy 3 core elements enhance the foundation.
Spanned the portfolio and add more value, which are transforming vectors and or a larger scale higher value and differentiated platform.
Please turn to slide 5.
Our second quarter results are demonstrative of vector is the increasing physician and significant opportunity and the Pacific region.
During the quarter, our <unk> revenue grew meaningfully and we increased our operations and support and mission requirements and the region, our revenue and Indo Paypal now comprised of 6% of our total revenues.
Additionally, we believe the longer term opportunity for Vectra is to expand and grow and the region remains strong as our prime position under Logcap 5 of enables us to support the army.
Throughout the full range of operations and the region over the next 10 years.
Furthermore, we have strategically invested to bolster and increase our core set of capabilities and <unk>. Since 2018 today. The record provides several key solutions that are aligned to support the growing requirements of our clients.
1 of the solutions, the integrated electronic security and protection of critical assets and installations.
<unk> is the exclusive provider of C..3 integrated network security systems for the U S bases across Korea Vectren.
<unk> is off of the exclusive provider of security design, and <unk> network solutions supporting and protecting the for military sales F 35 program and Japan.
Additionally, under our fleet systems Engineering team asset program vector of provide specialized systems engineering and communication support to forward deploy naval forces and Japan and throughout the region.
Our asset teams help ensure the readiness of U S naval ships.
And continuity of Navy sea for ice systems, and the advent of system malfunction attack cyber attack and other system impacting incidents.
Through our engineering and digital integration solutions today, the vectors of integrating CBR and sensors force protection assets and other data sources and as part of an Iot solution at certain <unk> installations that will provide early warning and enhance situational awareness of potential threats.
Yes.
Vectors have the legacy of providing multifunctional logistics and sustainment level of maintenance of vehicles and preposition stock.
We also provide full spectrum MRO services for legacy and next generation aircraft.
Currently and and Okay com, we are providing maintenance of the C 130 aircraft and Japan. In addition to maintenance and readiness support services for ground vehicles and the region.
We believe the requirement for the services will expand and vector remains positioned to support our client requirements.
Vectors of this facility and operations and maintenance services are critical to the expected future growth and endo pay Cam arc.
Our converged infrastructure solutions support all Dod clients and today are providing operations support services at several locations and the Pacific.
This aspect of our business will increase and we complete the transition and ramp up of enduring operations at the Kwajalein Atoll, which is currently planned to reach full operational capability and mid 2022.
In summary, vectors is well positioned and the Pacific to support our clients' requirements as well as the dod's intent to improve posture and the region.
Please turn to slide 6.
We continued to deliver our strategy to diversify our client portfolio win new business and improve operational performance by aggressively leveraging technology. Our Navy growth campaign continues to expand as we combine our capabilities to deliver innovative technology based solutions, while improving mission effectiveness.
The results of this campaign are seen and our financial results with Navy revenue, increasing 288% year over year, driven by organic wins and M&A.
The Navy now comprises 12% of our total revenue versus 4% last year.
During the second quarter, we were awarded of physician on the Navy's worldwide Expeditionary Multiple award <unk> contract for <unk>.
The contract provides worldwide expeditionary supplies and services to support humanitarian and disaster relief military exercises and contingencies and 22 geographic regions.
This award builds on our position under the Navy Global contingency services contract, which has been an instrumental part of our Navy campaign.
While the contract is currently under protest we plan to utilize this vehicle as another route to access this important client.
And aggregate based on the demand from our client and opportunities and our pipeline. We expect our work with the navy to expand over the next several years.
Please turn to slide 7.
Our acquisitions of genetics and Hh, we remain on track and have resulted in a more capable and diverse company or.
Our combined pipeline of future opportunities continues to expand and our teams are leveraging joint capabilities pet performance and client intimacy.
We are building onto the net ex foreign military sales capabilities and continue to see future growth and this area, especially after the company was just awarded a contract to provide support services to the state of Kuwait.
We believe that over time, the higher margin Fms market will increase as an overall percentage of vectors with total revenue.
As you can see on this slide our acquisition strategy has resulted in a significantly enhanced company from a capability and client perspective in 2018, we materially expanded our sensor integration and internet of things and perimeter security solutions and 2019, we acquired a leading provider of integrated electronic security.
<unk> systems and late 2020, we introduced the net aches and Hh be allowing us to deliver a more integrated and comprehensive suite of solutions to our clients globally.
Our balance sheet remains strong and we continue to pursue inorganic activities that will increase the diversity of our portfolio expand margin and make vectors of premier provider of converged solutions.
Please turn to slide 8.
In terms of our new business pipeline vectors remains well positioned to grow organically and win its fair share of over $11 billion of new opportunities, we have and our pipeline. It is important to note debt recompete of our not included in this amount.
I'd like to point out that given the velocity of the Wildcat 5 task our pipeline does not reflect these potential opportunities.
As an example, the pipeline does not reflect recent activity and supportive of the emerging Afghan refugee situation, but we are actively engaged in discussions requiring potential role and support of the situation.
And 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 to slide 9.
Financial and operational strength demonstrated in the second quarter is representative of <unk> ability to generate solid growth and earnings power.
Second quarter, 2021 revenue grew 40% or approximately of $135 million year on year to $471 million.
Excluding the contribution from our 2 recent acquisitions of $64.4 million.
Organic revenue grew $74 million or 21%.
Organic revenue was driven by our support of the defender Pacific 'twenty, 1 exercise and the endo pay com and ramp to full operational capability of Logcap side of Iraq and the quarter.
Adjusted EBITDA for the second quarter of 2021, with $26.6 million or 5.6% margin.
Margin was driven by our acquisitions at the end of Q4.2020.
Our enterprise performance improvement initiatives.
Contract execution and the quarter.
Ability to convert cost plus components of contracts to fixed price and.
And our continued efforts to transform <unk> into a higher margin business.
Second quarter 2021 interest expense was $2.3 million up approximately $1 million year on year due to the company's 2 acquisitions late last year.
Diluted earnings per share for the second quarter of 2021 was $1.35.
Adjusted EPS, adding back the amortization from acquired intangible assets with the $1.52.
Relative to last year, the increase and diluted EPS was driven by the Companys improved operating performance 2 recent acquisitions, both of which were partially offset by higher interest expense and a higher effective tax rate of.
Operating cash flows for the quarter were $35.7 million and for the half $14 million. This compares to operating cash flows and the prior year of $20 million and the same quarter last year and $21 million for the half explain the benefit of the cares federal and payroll tax deferrals.
And <unk>.
In summary, our second quarter results demonstrate our ability to grow organically and execute on our strategy of inorganic growth, enabling the transformation of the company and to a higher value platform.
Please turn to slide 10.
Our strategic execution and recent acquisitions have resulted in a more capable and diverse company.
Navy revenue now represents 12% of total revenue compared to 4% during the same period last year and a growth of 288% year over year.
Our organic growth and strategic acquisitions have also further diversified our geographic portfolio.
And the second quarter, our revenue and Endo pay come grew approximately $28 million year on year and now represents 6% of total revenue.
Our targeted focus on increasing our capabilities and presence in the region as well as the phase in of Logcap 5 is now visible and our results are.
And our footprint and Endo pay come we will continue to increase as we ramp up the <unk> task order.
Additionally, our U S based revenue composition grew to 31% of total revenue as compared to 25% at the same time last year, driven mainly by our 2 recent acquisitions.
Please turn to slide 11.
The second quarter 2021, total backlog was approximately $5 billion compared to $3.8 billion and the second quarter of 2020.
Total pro forma backlog was $5.3 billion and includes contract wins currently under protest.
Funded backlog was $1.3 billion.
Please note that index Walker is included in total backlog as vectors with given the notice to proceed on the new contract.
The Companys trailing 12 month pro forma book to Bill was 1.5 times compared to 1.4 times and Q2 of 2020.
Please turn to slide 12.
Cash at quarter and was approximately $69.8 million.
Total debt was $175 million and net debt was $105.2 million.
Both total and net debt were up from prior periods due to the acquisitions of genetics and Hh be on December 31, 2020.
The company's total leverage ratio was 176 times well below its covenant level of 3.5 times and we plan to utilize our strong balance sheet to enhance vectren is positioned and the market through the prudent deployment of capital that generate solid returns for shareholders.
Please turn now to slide 13.
And given our strong first half performance, we are increasing our guidance for revenue and adjusted diluted EPS.
Revenue guidance is $1.74 of 5 to $1.780 billion.
The revised revenue guidance represents year over year growth of 25% to 28%.
Adjusted diluted earnings per share guidance, adding back amortization from acquired intangible assets is increasing to $4.76 to $5.7.
This new range for EPS reflects year on year of growth of 42% to 51%.
The adjusted EBITDA margin range is unchanged at $4, 8% to 5.0%.
We expect net cash provided by operating activities to remain in the range of $58 million to $65 million due to the number and magnitude of new program ramps and.
I'd like to now open the call up to questions.
Operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is and the question queue.
Press Star 2 if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary and pick up the handset before pressing the star keys.
And we will.
Our first question comes from the line of Joe Gomes with Noble capital. Please proceed with your question.
Good afternoon, and Chuck and Susan Great quarter.
Thank you Joe how are you.
Doing well here, so I guess kind of the first question I just wanted to throw out there.
And the Logcap and opaque Tom Youre, there had been some issues in the path of getting base access due to the Covid and now that we've got this delta of varian going around and making it and make them. It's may.
Are we seeing any additional.
Increases in base and access difficulties are you that pretty much in the past.
We have so.
The good question, we do have people.
And the Marshall Islands that we've been through some of the preliminary transitional activities.
At this point and time.
The communications, we have with our clients has us transitioning the full operational capability and in mid 2022. So the where we are right now we have heard nothing to the contrary, but obviously with everything to do with Covid and tracking the situations.
Lee on a daily basis.
Okay and.
And I know.
And this has come up and some of the other calls that we've talked about.
And so.
Staffing.
And at inflation cost of.
And of things.
Are you guys, having any difficulties and staffing up zone and with some of all of these wins that you recently got.
As inflation, causing any issues for you guys.
Thanks for any insight on that 1.
It is a competitive market and no doubt and.
And frankly and several of our business advisory functions.
And are more impacted by the use of the current U S. Staffing situation is something that we're monitoring on a daily basis as well.
And again, 1 of the benefits of having.
And the cost type contract portfolio of being.
And the 70% ish, we do have some protection in terms of labor costs, but at this point and time predominantly for our O Conus roles.
And we're monitoring the situation very carefully.
Seem to be doing a good job, making sure that open seats are full.
But again, it's it's an environment like nothing we've had and the left.
A handful of years and it's something that we're watching closely and by the way I'd like to also add debt. We've deployed some new technology suites here over the last.
A couple of quarters that are really making and as I think a bit more agile which has helped the situation.
And Joe I would just add a ton of some of our fixed price programs that are covered by a collective bargaining agreement.
The majority of those cases, we're able to recoup from our customer Windows CBA are those negotiations occur we're able to get reimbursed even under the fixed price.
Okay.
The good knowledge.
You talked some on the pipeline and.
The backlog from.
And I'm working from the first quarter of the second quarter.
The pipeline seems to have shrunk a little bit from 12 billion until 11.4 billion.
And I think.
Even the backlog has shrunk a little bit I'm, just wondering if you could kind of.
Add some more detail or color there as to what was going on quarter to quarter.
We could.
Its normal contracts from movement quite frankly, we've had some wins as you know.
And I have to tell you I couldnt be more pleased with the.
And with both not only of the shape.
Our new business pipeline.
But the the diversity across our clients.
The acquisitions that we've done over the last couple of years has really broadened our capability set and I'd like to think that we have a much more diverse new business pipeline now than we did just a few years ago. So.
A lot of.
And $11 billion.
And our new business pipeline.
Very healthy and continue.
We continue to think that our win rates are at least at the market levels.
Okay, and 1 more for me and I'll jump back in queue on the guidance.
2 quick questions.
So you didn't increase the.
The adjusted EBITDA margin.
The guidance.
I think and the.
The.
The first quarter. It was 4.8% and I think of the second quarter. You said it was 5.6 and <unk>.
And why no increase and.
On the adjusted EBITDA margin and 2.
Hi.
And my math real quick.
And I'm looking at your midpoint guidance on the revenue side. It would suggest that the second half of the year revenues are going to be down from the first half of the year and it seem to recall that historically, it's been switch you guys typically have done a stronger the second half of the year than the first half of the year.
<unk> also just again looking for a little more detail or insight on that thank you.
Sure and so.
No.
This year.
For Vectra, and <unk> 'twenty 'twenty 1.
Really fortunate and blessed to have a say.
Significant number of new contracts phasing into the portfolio.
We have really for the first time ever now of the Logcap has moved into full swing beginning to introduce.
And a quick introduction quick burn and types of programs. So how I would look at our 2021 and.
And we were very successful and.
Moving to some of that new revenue to the left.
The reality is is that we're phasing out of certain programs.
That is now being taken into the Logcap and other environments for that matter. So it's really just the timing issue and what you'll notice of that we're going to move from.
And a 4% full year margins and 22 full year at the midpoint and 4.9% and 2021, so our activities to increase the profitability of our business.
We continue to make progress.
And again at the midpoint of revenue and that's it.
The 20, some odd 26% revenue increase for the year and we'd like to think that our organic growth would be approaching the 10% of within the 26%. So while I agree that the timing is a little different than and.
For years, it's really reflective of the success that we've had.
Of winning in and now phasing and now that we're past COVID-19.
New programs, while phasing out of old vehicles, Susan and anything to add.
Just maybe 2 things I think Chuck in your prepared remarks, you mentioned something about anthem velocity the <unk>.
Past quarters, and that's kind of of what we saw and the second quarter. So in some respects that pulled forward some revenue out of Q3.
We also have the drawdown in Afghanistan and network covering and our outlook.
And a number of program completions and I think you are aware of the <unk> swap of Recompete and the pricing reset that goes along with that and so as Chuck said I think with our outlook. We're looking at 26, 5% at the midpoint.
Growth, which we're ecstatic about.
And the high single digit growth rate.
And I think of really good new story for us and and increasing.
And by 90 basis points.
Adjusted EBITDA margin is just we couldnt be more pleased.
Great. Thanks for thanks for calling.
That answers it and it's very insightful I appreciate that and again, thanks for taking my questions and great quarter and look forward to the second half of the year. Thank you.
I appreciate it thanks for the questions.
Thank you. Our next question comes from the line of Robert Connors of Stifel. Please proceed with your question.
Hey, guys.
Rob here for Joe de Nardi at Stifel and congrats.
Congrats on the quarter.
Thank you.
Just I guess qualitatively on Indo pay com, it's still at relatively small levels.
I believe the numbers of our 6% of revenues grew about $28 million.
Year over year.
Conceptually when you sort of look at that.
Is there.
Anything that you can give us color wise on the potential for <unk> com and the long run or qual.
Qualitatively, where you're at right now I believe and the press release.
You had pointed out your.
<unk> ramped up on just 1.
<unk> the pronunciation, but just 1 of the islands and the Marshall Islands like longer term what are some of the potentials there.
Yes, sure is we devoted quite of bit of time, too and the pay com and in our prepared remarks.
And we couldnt be more pleased with our positioning.
Both from a delivery perspective, and the contract vehicle perspective.
The Kwajalein base, which is the base that the.
And we referred to and the Marshall Islands.
Actually of nuclear mission and that path was a part of the original Logcap win Unfortunately because of Covid the.
Transition has been delayed but again I mentioned in my prepared remarks.
We're on the island, we've been through transition planning, we're in constant dialogue with our clients and to this day as we speak today the <unk>.
Transition to full operational capability should be scheduled for.
Yeah.
For the the May ish timeframe I think I said, the mid 2020 day timeframe. So again, we are very pleased with our positioning.
And the exercise that we talked about and the prepared remarks.
And as a as an exercise of the type of an exercise I should say.
And we should see on a regular basis and the <unk>.
Areas of operations that we are.
For a responsible for which would include both centcom and Endo Paypal. So a long winded answer to your question. There are a lot of moving pieces most of them very favorable in the air.
And they'll pay kind of region and we'll continue to see the geography.
Progressing as a percent of our total revenue over the next over the next year or 2.
Alright, Thanks, and then just sort of I guess.
2 questions from.
The related well just 2 questions 1 on the the EBITDA.
EBITDA margin guidance, essentially going up 90 bps year over year can you talk qualitatively like how much was M&A how much of the increases are in the organic and.
Just any color around that.
Yes, we're not kind of we're not going to get into the specifics of profit profile of individual acquisitions, but I will say I will say that the.
The acquisitions that we did at the end of last year and been accretive and that is a model for our continued capital deployment strategy.
We're going to continue to stay focused on acquisitions.
That will be technology enabled acquisition.
And it will be accretive to our overall portfolio.
I would say a good piece of the.
The increase in margin for 2021 is going to be attributable to.
Both of our enterprise of excess activities, where we are continuing to automate our business advisory functions and support of our projects and.
And just.
Outstanding performance on the part of our delivery teams year over year.
The base operation of the business does have it has a margin sensitive business, but our teams are making very good progress and.
And implementing new capabilities new techniques.
More highly automated ways to do things that used to be done and a more manual.
And Thats, what youre seeing and the and the margin expansion that we're projecting for the remainder of 2021.
Okay, great. Thanks for taking my question and congrats on a good quarter.
Thank you very much I appreciate it.
Thank you, ladies and gentlemen of the same there are no further questions and I'd like to turn the floor back to Chuck Prow for closing comments.
Thank you very much and thank you to everyone who joined the call today.
We're again, we're pleased with the results of the second quarter and we look forward to updating you.
And with the results of the third quarter in October and we'll talk to you soon thanks.
Yes.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.