Q3 2021 Vectrus Inc Earnings Call
Hello, and welcome to the Vectren third quarter 2021 earnings conference call.
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Now I would like to turn the conference over to Mike Smith Director of Investor Relations and corporate development. Mr. Smith. Please go ahead.
Thank you good afternoon, everyone and welcome to the <unk> third quarter 2021 earnings Conference call.
Joining us today are Chuck Prow, President and Chief Executive Officer, and Susan Lynch, Senior Vice President and Chief Financial Officer.
Slides for today's presentation are available on our Investor Relations website investors dot veteran dotcom.
Please turn to slide two.
During today's presentation management will be making forward looking statements pursuant to the safe Harbor provisions of the federal Securities laws.
Please review our safe Harbor statements in our press release and presentation materials for a description of some of the factors that may cause actual results to differ materially from the results contemplated by these forward looking statements.
The company assumes no obligation to update its forward looking statements.
Additionally, I would like to point out that we will be discussing and reporting adjusted non-GAAP metrics included adjusted operating income and margin adjusted EBITDA and margin.
Adjusted net income and adjusted diluted earnings per share the.
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 Pro.
Thank you Mike and good afternoon, everyone. Thank you for joining us on the call today.
Before we get started I would like to thank all of our employees for their dedication and remarkable contributions and supporting the recent evacuation of thousands of Afghan refugees.
Third country Nationals and Americans from Afghanistan.
This undertaking was the largest noncombatant evacuation in U S history, and our team's commitment to the mission and performance was exceptional our.
I recently visited our overseas locations in Centcom and met with our teams and clients that directly supported this major humanitarian effort.
The accomplishments stories and the feedback I received from clients regarding the contributions of our employees was outstanding.
I'll discuss some noteworthy highlights shortly.
Please turn to slide three our third quarter results were strong driven by a 30% year over year increase in revenue.
Organic growth was also strong increasing 13% year over year, reflecting expansion in our core business, new wins and phase ins.
The ability to generate substantial cash from operations remains an important characteristic of our business and during the quarter, we delivered $39 million of operating cash flow.
Adjusted EBITDA margin in the quarter was four 5% and adjusted diluted earnings per share increased 19% year over year to $1 15.
We are continuing to grow and expand our presence in the Pacific or and they'll pay come for.
For example, just last month, we were awarded a task order with an eight year performance period to provide logistics and support in the Philippines. In addition, we recently completed the pre transition site survey for a logcap five Kwajalein task order and we anticipate the phase in to start by the end of the year and to.
Reach full operational capability and revenue run rate by mid 2022.
Importantly, our revenue in Indo pay count now makes up approximately 5% of our total revenue.
Versus 1% in the same period last year.
We believe <unk> will be a key long term growth driver for Vectra is given the dod's intent to improve posture in the region.
A prime position under Logcap five enables us to support our clients throughout the full range of operations in the region over the next decade.
Our client campaigns remain instrumental to our growth and diversification strategy.
During the third quarter, we continued to build on our Navy campaign and recorded several notable technology enabled wins that further our position as the premier converged infrastructure company.
We also continued to advance our leadership in five G and are supporting cutting edge testing and experimentation for the D O D.
For example, we recently supported the successful demonstration of our five G network for smart warehouse and see significant applications for our clients converged infrastructure operations.
We ended the quarter with a total backlog of approximately $5 billion and pro forma total backlog of $5 $1 billion.
Given our solid year to year results, we are reiterating our 2021 guidance ranges.
Please turn to slide four victory.
<unk> is well known for its ability to provide rapid response convert solutions across all time zones and operating environments.
Which was demonstrated in full by our team during the resubmission to evacuate various populations from Afghanistan.
Supporting our clients' mission, that's where the historical undertaking that our teams tackled with a highest level of skill precision and dedication.
In one case, our team received a logcap five tasks to bill out living space that could accommodate several thousand Afghan refugees and 45 days. Our teams worked around the clock under extreme weather conditions to design construct and operate over 250000 square feet of living space.
This was a remarkable achievement and while we have one example shown on this slide several vector if locations in centcom, including Qatar and Bahrain supported this important humanitarian effort.
I'd like to commend our entire team for going above and beyond to support this critically important mission.
Please turn to slide five.
Our client campaigns remain instrumental to our growth and diversification of our business.
The momentum associated with our Navy campaign continued in the third quarter with several noteworthy technology based wins that further our position as the premier converged infrastructure company.
First vectors for the water at a prime O T a contract to provide automation and the receipt and tracking of materials for the Naval Air Warfare Center aircraft Division.
Under this small but important contract we will provide a solution that utilizes RFID technology to automate the receiving.
And distribution processes, while providing readily available metrics and reporting indicating material delivery location and quantities.
Lee vectors with awarded a contract to further develop their real time spectrum operation software for the Navy's fleet.
Our T. S. So it is a capability integration effort responsible for providing spectrum planning sensing monitoring prediction and maneuvering capabilities to support electromagnetic spectrum operations.
This award was based on our decades of experience, providing leading edge electromagnetic environmental effects engineering and spectrum operations.
Finally, beckwith was awarded a position on the $93 million five year multiple award <unk> contract to provide R&D engineering integration cyber security upgrades and Sustainment for various tactical threat systems for the Navy. This award represents both the new client and.
An expansion in our capabilities.
The result of our Navy campaigns are seen in our financial results with Navy revenue, increasing 180% year over year, driven by organic wins and M&A and now comprises 11% of our total revenues versus 5% last year.
We believe that based on the opportunities in our pipeline and client demand signals our work with the Navy will continue to expand over the next several years.
Please turn to slide six.
We are continuing to build <unk> position as a leader and innovator in <unk> and converged infrastructure enablement by utilizing our operational expertise and solutions and supported the largest full scale five G test for dual use applications in the world.
You may recall that a year ago. It was announced that Vectra was awarded two contracts as part of the Dod's <unk>.
<unk> experimentation and testing at five U S military test sites, which was earmarked at $600 million.
Recently, the Dod completed its first five G project demonstration of our smart warehouse for Marine Corps logistics base Albany.
Vectra is supported the successful demonstration and as a subcontractor assisted in the design development and installation of our radio area network Testbed.
The network will enable a broad set of smart warehouse use cases, such as warehouse robotics, and holographic augmentation and virtual reality applications as part of a modernizing Marine Corps operations.
We also recently demonstrated the Vectren converged infrastructure five G. Three D logistics hologram at the Army's annual industry Conference a USA last month.
The vector with use cases unique in that it shows a hologram guiding the user through a warehouse to find a specific item.
After finding the item. This system can then scanner code to display a three D image of the items contents.
Ability to be directed to a specific item and then visually confirm the item in real time at an incredible value to the warehouse operators.
Our second five year contract is a three year prime contract for the Naval base Coronado Smart warehouse under which we will provide industry, leading inventory management network security robotic material moving and environmental sensing capabilities. We are currently working on phase one of that prototyping effort.
And our team recently demonstrated how augmented reality and RFID location surfaces can assist clients.
We believe there is a significant long term growth opportunity associated with the enablement of five G. <unk>.
And our clients migration to converged infrastructure operations.
Records are investing to capture the expected future growth as part of the five G initiative. For example, we recently launched the Vectren five G network for integration connectivity and experimentation or the Vectra is five G. Nice slab that includes a mockup warehouse to be used for development.
Testing and demonstration purposes.
Innovative technologies to be demonstrated include RFID tags, and portals small and large autonomous movers smart shelving smart lockers and augmented reality mixed reality pickup and Paul technologies.
Please turn to slide seven.
We are making great progress advancing our Iot sensor integration machine learning and data analytics offerings, which are allowing us to deliver a more integrated and comprehensive suite of solutions. We are also extending our differentiated solutions to new clients and markets. For example is.
Part of the CVR N O T. A contract our team recently deployed nine newly designed integrated early warning Dropbox sense certain closures at the 2021 Indianapolis 500, the sensors were designed to detect and notify stakeholders of a potential bio weapons release.
Security unit utilized the newly developed E. W. Dropbox is that incorporated various bio threat chemical and meteorological sensors with vectors with sensor management system software.
This unique combination of sensors and software allowed for the integration and processing of sensor data from multiple sources as well as data analytics and visualization at the local command center the vector software there with inside the sensor enclosure enables fast data processing and a user friendly interface, allowing local police.
Energy and public health departments to view realtime data for the event.
We are proud to have supported this important operation with a new client and a new market.
Please turn to slide eight.
Our new business pipeline is approximately $11 billion with $2 $1 billion of bids submitted awaiting award and $8 $7 billion that we plan to submit over the next 12 months.
As you can see on the page.
Our new business pipeline and reflects our continued focus on executing targeted growth campaigns to diversify our portfolio.
There is also a greater concentration of higher margin solutions based opportunities in our pipeline, which are driven by the organic and inorganic investments we've made in the business.
Like to note that the withdrawal from Afghanistan and resulted in a slight erosion of our pipeline, but we have since redeploy those business development resources to other pursuits. Lastly, our pipeline does not currently include any logcap five related opportunities.
And only an immaterial amount of international client opportunities given the fluid timing associated with those efforts overall, we remain confident in our ability to successfully compete and win our fair share of new business now I would like to turn the call over to our Chief Financial Officer, Susan Lynch for a review of the <unk>.
Actual.
Thanks, Chuck and good afternoon, everyone. Please turn with me to slide nine.
Third quarter, 2021 revenue grew 30% or approximately $107 million year on year to $459 million.
And the contribution from our 2020 acquisitions organic revenue grew 13%.
Organic revenue was driven by expansion into pay com ramp to full operational capability on Logcap, five Iraq and expansion of our core business, including support of the humanitarian refugee mission.
Adjusted EBITDA for the third quarter of 2021 was $20 5 million or four 5% margin compared to four 8% in the prior year's quarter.
Margin in the third quarter with influenced by the timing and phase in of New Awards program completions, and increasing volume of material and pass through content, which carries a lower fee.
Third quarter 2021 interest expense was $2 million up approximately $1 million year on year due to the company's two acquisitions.
Diluted earnings per share for the third quarter of 2021 was 87.
Adjusted diluted EPS, adding back amortization from acquisitions, M&A and integration cost and removing the benefit associated with prior year's tax credits with a $1 15.
Relative to last year adjusted diluted EPS increased 19% due to the company's organic revenue growth income from our two acquisitions.
Lower tax rate offset by higher M&A related interest expense.
Operating cash flows were $39 $4 million for the quarter compared to $3 3 million in the same period last year. An impressive result that was driven by our team's focus on cash collections and process improvement.
Operating cash flows were $53 4 million for the nine month period compared to $37 7 million in the prior year's period.
Excluding the prior year benefit of the cares act payroll tax deferrals year to date cash flow from operations improved 92% over last year.
Please turn to slide 10.
We continue to focus on diversifying our portfolio through organic and inorganic investments.
Our recent results with the Navy have been outstanding with revenue growing 180% year on year, and now representing 11% of total revenue compared to 5% during the same period last year.
Our organic growth and strategic acquisitions have also further diversified our geographic portfolio.
In the third quarter, our revenue in Endo pay com or Asia grew approximately $19 million year on year and now represents 5% of total revenue.
Our targeted focus on increasing our capabilities and presence in the region as well as the phase in of Logcap. Five is now visible in our results our footprint and into pay comp will continue to increase as we ramp up the Kwajalein task order and our recently awarded work in the Philippines.
Additionally, our U S based revenue composition grew to 30% of total revenue as compared to 25% at the same period last year.
Lastly, our contract mix has shifted to a greater percentage of cost type revenue compared to the third quarter of 2020.
This is partly due to COVID-19 impacts on revenue last year and the ramp of Logcap five this year.
Please turn to slide 11.
Third quarter 2021, total backlog was $4 9 billion compared to $3 7 billion in the third quarter of 2020 total pro forma backlog was $5 1 billion and includes contract wins currently under protest.
Funded backlog was $1 $2 billion.
The Companys trailing 12 month pro forma book to Bill ratio was one four times compared to one five times in Q3 of 2020.
Please turn now to slide 12.
Cash at quarter end was $53 $4 million total debt was $128 million and net debt was $71 $8 million.
Both total and net debt were up from prior year due to the acquisitions of genetics and <unk> on December 31 2020.
Strong cash generation further strengthened our balance sheet and provided the ability to pay down an additional $45 million of debt in the quarter.
Total and net debt were down sequentially from Q2, 2021 by $47 million and $33 million respectively.
The company's total leverage ratio was 133 times well below its covenant level of three five times.
We plan to utilize our strong balance sheet to enhance vectren is positioned in the market through organic and inorganic investments that align to our strategy.
Finally, we are nearing the maturity of our current credit facility and plan to leverage the significant advancements in our business and strong balance sheet to introduce a larger more favorable flexible and lower cost facility that supports our growth plan.
Please turn to slide 13.
Given our strong year to date performance, we are reiterating our previous 2021 guidance ranges.
Revenue guidance is $1 75 to $1 $78 billion or 25% to 28% growth.
Adjusted diluted earnings per share guidance is $4 76 to $5 seven or <unk>, 42% to 51% growth.
The adjusted EBITDA margin range is $4, 8% to 5%.
We expect net cash provided by operating activities to remain in the range of 58% to $65 million capital expenditures are expected to be approximately $8 million and as a reminder program related capital expenditures are considered in contract pricing and will be recouped all or in part over the performance.
<unk> of the contract now I'd like to open the call to questions operator.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please press star Hamzah.
Handset before pressing the numbers to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
Yeah.
And the first question comes from Joe Gomes with noble capital.
Good evening, Chuck and Susan Thanks for taking the questions.
You bet.
Okay great.
Another really nice quarter, just seem to be pointing them stringing them together here.
And bill pay com.
Awesome job, there isn't any any kind of way to size the potential opportunity there.
I know a lot of these things come about based on the contract or anything but.
I don't know where.
If you can give us any kind of more detail or color of Av.
What is the potential for Indo pay com could actually means of actress.
Hi, Joe This is Chuck how are you great question <unk>.
It is a.
An increasing portion of our overall pipeline, we don't really talk about the composition of the pipeline per se, but it is rapidly increasing 0.1 0.2 as you know Kwajalein with one of the tasks that we were awarded during Logcap and Kwajalein.
As currently as we stated in the prepared remarks currently about beginning the phase and should be fairly phased in very well.
Well phased in excuse me by the Middle of next year, we do expect that contract.
To be more than 10% of our revenue. So we will begin to report that as that comes online in the last part as you hear from a geopolitical perspective quite often.
This pivot to Asia is real from both our military and foreign policy perspective.
Our results both in this quarter.
Well with the prior quarter were favorably impacted by.
The <unk>.
Pacific defender activity and that activity what are the contingency operation to support an exercise and we expect to see that type of activity continue and in fact increase over the coming years. The last part point on the specific defender is that is.
That is a real example.
How the contingency operations portion of the Logcap contract.
Well increasingly affect our financial with making our financials that in many cases a bit more lumpy.
That kind of revenue really doesn't show up in backlog and in the case of Pacific defender.
The opportunity was identified it was.
Book and it was billed.
In less than two quarters.
So great question and to your point, we will consider and we are considering I should say, providing a bit more color to our pipeline in the future.
So we can demonstrate where we think we have emerging demand.
Okay. Thank you for that.
Much appreciate it and one of the recurring themes here.
<unk>.
A lot of the companies at least that I follow.
As is the very difficult labor market and difficulty in finding staffing.
Combined with the vaccine mandates that have been issued by the by the administration and especially for federal contractors.
I was just wondering how you guys are dealing with are finding staffing.
Ability our availability excuse me here and where do you guys I guess on the spectrum of being getting the workforce vaccinated or are you having issues with that is it something thats moving smoothly here.
Just curious as if it could be a potential hiccup.
Down the road here.
So a lot of questions in that.
In your one question. So let me kind of break them down piece by piece.
Like other companies, we continue to face chat.
Challenges in terms of identifying and deploying.
Resources as you know a big part of our business model is the use of foreign national and local net foreign national and local labor.
So in terms of keeping our programs staffed.
Covid has been difficult, but as you can see by our results we've been able to find the right types of people in the right locations to continue to drive revenue.
With regard to the vaccine mandate first of all we take this very seriously we've been tracking both COVID-19 effects and COO.
Covid mandates from the beginning.
We most of our other businesses have been affected by Covid and we look to get our staff.
Accelerated.
For the order as quickly as possible is important to note. However that as you know 80% of our business approximately comes outside the continental United States and the current executive order is really focused on U S. Based employees. So we have.
While the need exists they give people mandated as quickly as possible to keep our people and our clients safe the mandate effect itself really affects our corporate office and our U S based contracts.
More directly.
Okay. Thanks for that insight and one more if I may.
Again, really really nice quarter here.
Companies in our industry, we did have some effects from Afghanistan.
That or not overall material as we talked about in our last call, but there were some effects from Afghanistan 0.1.
Two is we do have a number of contracts in transition.
And closeout between prior contract structures.
And new contract structures, such as Logcap.
The final point is that we were greatly benefited in quarters to them quarter three.
From the contingency work that I described earlier and so one of the.
Areas that we need to continue to work with you and your colleagues in our investors.
With the blessing of Logcap come with a bit of reeducation in terms of how our revenue can be a bit lumpy. If you will quarter to quarter, having said all of that we are not prepared and we're not going to give 22 guidance yet.
But I do I do see as I look into 22.
In organic business base that will lead again to growth and growth and 22.
Great. Thanks for that shock raunch appreciate it again really nice quarter.
Thank you Joe good talking to you thanks, Jeff.
Thank you and this concludes a question and answer session I would like to return to afford a chunk pro for any closing comments.
Thank you and thanks for everyone for joining the call today, we look forward to catching up catching you up on our full year.
Performance. The next time, we get together, thanks, a lot and have a good day.
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