V2X, Inc. (VVX) Q1 2020 Earnings Report, Transcript and Summary

Thank you for joining us today for the Vectrus First 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 in a listen-only mode. Following management’s presentation, I will open up the call for the question-and-answer session. [Operator Instructions]And now, I’ll pass the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus. Thank you. You may begin.

Thank you. Good afternoon, everyone. Welcome to the Vectrus first quarter 2020 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.vectrus.com.Please turn to Slide 2. 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 material 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 operating income and 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, press release, and Form 10-Q.At this time, I’d like to turn the call over to Chuck Prow.

Thank you, Mike, and good afternoon everyone. Thank you for joining us on the call today. This quarter, we, in every business around the globe, have been adjusting to the COVID-19 pandemic and keeping our employees, clients and partners safe. Vectrus provides critical infrastructure support services globally, for a variety of national security missions. This core competency combined with our backlog of long-term contract with the U.S. government, creates operating and financial resiliency with predictable free cash flow. This is foundational to our business model. We are proud of the contributions our teams are making to support our men and women on the frontlines as such a difficult time. At the same time, we are not distracted from our opportunity to transform Vectrus and do a leader in the emerging converged infrastructure market and as such, our strategic priorities remain unchanged and achievable.Please turn to Slide 3 and let’s touch on our first quarter results. We began the year as expected with continued top-line growth. Revenue grew 8% in Q1, which is supported by a solid organic growth of 4% and a minimal impact from COVID-19. This growth came from a $14.6 million expansion on our existing programs, as well as an $11.2 million contribution from our acquisition of Advantor.Our client portfolio and revenue base continue to diversify, and we expand our market share with the Army, the Navy, and the Air Force. We also improved our profitability in the quarter through continued focus on program delivery excellence. Adjusted EBITDA margin expanded 30 basis points to 4.2% in the first quarter and we grew adjusted EPS by 9% despite a $0.02 per share headwind from COVID-19. We achieved improved results even while continuing to invest in our business including starting LOGCAP V.Through our growth related efforts, we continue to win new business with all of our major clients. Regarding our Army client, we are expanding our footprint through LOGCAP V and other new program wins. in recognition of our rapid response supply chain capabilities, we recently won a task order to provide supply chain as a service capability to procure COVID-19 personal protective equipment for the Army, the research, development, acquisition and production program. While small and value, this demonstrates our client’s recognition of Vectrus is having the ability to offer an immediate solution for something as urgent and critical as a safety and health of those conducting ongoing national security missions during an emergency.In another recent award, we will provide software and engineering to support sensor data integration and visualization of our nation’s investment in chemical, biological, radiological, and nuclear defense equipment to the joint services. To put this in context, this award came to us in part as a result of our legacy and sensor integration dating back to 1995.As we reported in our last call in February, we received a $122 million modification of the OMDAC-SWACA contract for enterprise network capabilities and services to support the U.S. Central Command. OMDAC includes operating the Army’s largest cyber center and network footprint across the Middle East. This is particularly important now as a criticality and need to maintain security and reliability of the Army’s 24x7 connected networks have never been higher. Our team throughout CENTCOM and rapidly adjusted to a variety of health and safety requirements across the countries we operate while maintaining network uptime across borders.It is worth noting that Vectrus again, received the DISA Central Facility of the Year award for network reliability and mission essential critical operations associated with this program. While this contract is still under re-compete, we believe we are in a position to retain this program that we have been supporting since 1995. Our Air Force campaign continued to drive growth. In April, we were awarded a seat on the Air Force contract augmentation program or AFCAP V. The Air Force is $6.4 billion IDIQ contract vehicle. Vectrus was first awarded a position on the AFCAP contract in June of 2015 and since that time have one 13 task orders in multiple countries worth over $130 million.We have placed significant emphasis on our Air Force growth campaign, which has resulted in a 24% compounded annual revenue growth rate for the three years ending 2019. And in total has positioned us in 13 countries with this client. Recently, the Air Force selected two F35-A locations for the Air Force National Guard, which will necessitate enhanced electronic security required by the DoD’s fifth-generation fighters. Because of Advantor’s experience protecting the F35 fleets, we see a strong opportunity for us to increase content and to protect these advanced aircraft at new locations. Additionally, we see opportunity for Advantor to provide enhanced electronic security at Air Force installations and support of the global air crew strategic network terminal. Advantor is the base wide security system on two of these early bases, receiving the terminal installations as part of this ground network.These systems will permit command and control through advanced communication satellites to the Air Force strategic bomber fleet as well as the tanker and intelligence fleet. This ground capability will initially be installed at approximately 50 Air Force bases and we believe will be an additional stream of business for Advantor due to our dominance in the base wide electronic security systems at these installations.Our Navy campaign also continues to be successful. We discussed last quarter our win on an eight-year $45 million contract to provide base operations support in Deveselu, Romania. The first Aegis Ashore missile defense facility placed into operation. Despite the coronavirus backdrop, our transition team is onsite and preparing to transition later this year. We also won a small, but strategically important operational technology contract to provide electromagnetic effects engineering, leveraging our legacy and protecting ships communications.And finally, subsequent to the quarter-end, our Vectrus and J&J worldwide services joint venture was awarded an eight-year $190 million contract to provide base operations support services at Naval Air Station Patuxent River. As you can see in our year-to-date awards, our growth campaign is driving strong success. These wins together demonstrate an effectiveness of our strategy and we expect additional wins from our approximately $1.4 billion in bids submitted and pending potential award.Our backlog grew 48% sequentially to $4.1 billion, a record high. This growth and backlog supports our view of revenue growth in the rest of 2020 and beyond. Given the strength of our business model, we are reiterating our 2020 guidance and are actively monitoring the COVID-19 response and LOGCAP V phase in schedule. Our strategic priorities are unchanged and we continue to focus on achieving our objectives.Please turn to Slide 4 to discuss how we are meeting the challenge of COVID-19. Vectrus served critical infrastructures and network that must continue to function to support ongoing missions that are critical to our national security. As a matter of principle, we are doing everything we can do ensure our teams and clients’ health and safety amid the pandemic, while respecting the laws and protocols in every client environment in country we operate. Because of our operations in South Korea, it became evident to us early on that we were likely dealing with the pandemic and immediately, begin taking steps to ensure employee health and safety.We leverage the Vectrus operations center, which monitors operations for Vectrus around the globe to serve as a hub for efficiently flowing and updating protocols, and safety information across the company. This enable our people to best assess, manage and address circumstances in individual locations as the crisis unfolded and shared best practices for safety and mission execution worldwide. In addition, our people are meeting the challenges of the moment to serve our clients.For example, we are supporting the Air Force’s efforts during COVID-19 to host basic military training recruits at Keesler Air Force base, which houses medical and expeditionary training capabilities. We successfully managed the surge of incoming airmen at Keesler as part of the Air Force’s efforts to spread out training across basis to protect recruit and instructors from the virus.Our fleet systems engineering team directly supported the Navy deployment of the hospital ships Mercy and Comfort to San Diego and New York City respectively in the fight against COVID-19. Our FSET rapidly delivered engineering expertise to provide secure and reliable pier-to-ship connectivity, increasing bandwidth, and improving communication to support the relief efforts. In Kuwait, to comply with the Evolving Host Nations protocols, our K-BOSSS team developed a detailed, critical, essential mission support plan to move several hundred employees into accommodations on military installations to ensure delivery on missions.This demonstrates how integral our teams are to clients’ mission continuity and success. More than 13,000 combined employees and partners of Vectrus are on the front lines and support of our clients throughout the pandemic, I cannot thank them enough for their professionalism and for remaining true to our values and dedication to our clients’ missions.Now, I would like to turn the call over to our Chief Financial Officer, Susan Lynch, to review our financials.

Thanks, Chuck and good afternoon everyone. Turn with me now to slide 5 to discuss our first quarter results. First quarter 2020 revenue was $351.7, million up $25.8 million or 8% year-on-year. Organic revenue growth was 4% year-on-year excluding the contribution from Advantor, which was acquired early in the third quarter of 2019. I’m pleased to report that we saw revenue growth in all geographic regions, driven by an increase of $11.5 million from our middle East programs, an increase of $10.1 million from U.S. programs and an increase of $4.2 million from European programs.Our revenue with the Army grew 9%, Air Force grew 8% and Navy revenue grew 1%. Our K-BOSSS contract contributed $124 million or a 35% of total revenue in the quarter. Operating income for the first quarter of 2020 was $12.5 million or 3.5% margin compared to 3.2% margin in the first quarter of 2019.adjusted operating income for the first quarter of 2020 was $12.6 million or 3.6% margin compared to 3.5% in the first quarter of 2019. adjusted operating income increased $1.2 million year-on-year due to an increase in revenue and improved operating performance.First quarter 2020 interest expense was $1.7 million, up $128,000 a year-on-year due to the preemptive draw on the company’s revolver as a result of concerns around the COVID 19 pandemic. adjusted EBITDA for the first quarter of 2020 was $14.6 million, up 14% from last year. Adjusted EBITDA margin was 4.2%, up 30 basis points from 3.9% in the first quarter of 2019.net income for the first quarter of 2020 was $8.7 million as compared to $7.1 million for the first quarter of 2019. the effective tax rate in the first quarters of 2020 and 2019 was 19.6% and 19.8% respectively. Adjusted net income was $8.8 million, up 11% compared to the prior year. Diluted earnings per share for the first quarter of 2020 were $0.74, compared to $0.62 in the prior year. Adjusted EPS was $0.75 of 9% year-on-year. Our first quarter results were minimally impacted by COVID-19 and we estimate that the impact of COVID-19 in the first quarter was a decrease of approximately $2.2 million in revenue and a negative $0.02 in earnings per share.Turn with me now to slide 6 to discuss cash and liquidity. Net cash provided from operating activities in the first quarter of 2020 was a positive $1.1 million, an improvement of $7.5 million as compared to the first quarter of 2019, driven by strong collections in the quarter. Given the initial uncertainty associated with COVID-19 in mid-March, we made the decision to preemptively draw $115 million on our revolver and to maintain that position across quarter-end, which the company has never done before.As of today, about half of that amount has been repaid with approximately $60 million currently outstanding. Cash at quarter-end was approximately $146.2 million, total debt was $184 million and net debt was $37.8 million, approximately flat to Q4 2019. the company’s total leverage ratio was 2.6 times and our net leverage ratio was 0.5 times.Let’s turn now to slide 7 to discuss our backlog. First quarter 2020 total backlog with approximately $4.1 billion, an increase of 48% and a record high for the company. Total backlog includes the receipt of extensions for K-BOSSS, OMDAC-SWACA and awards on NSF, Deveselu, Romania BOSS and LOGCAP V task orders. Funded backlog was flat at $1.1 billion compared to the first quarter of 2019.the company’s trailing 12-month book-to-bill ratio was 1.5 times. Our book-to-bill increased substantially this quarter due to the receipt of the contract extensions and the new awards I just mentioned. Our large backlog is a unique attribute of our business and represents 2.7 times the midpoint of our 2020 full-year revenue guidance providing visibility into the remainder of the year and beyond.Let’s move now to slide 8 to discuss our 2020 guidance. We are reiterating or full-year 2020 guidance ranges for revenue, EBITDA, diluted EPS, and net cash provided by operating activities. We’re currently estimating that there could be an approximately $20 million to $25 million impact on revenue with a corresponding impact to operating income in the second quarter of 2020 as a result of COVID-19. We’re working with our clients with regard to their COVID-19 response and LOGCAP V phase in schedule. Should the facts or assumptions surrounding our guidance change, we will update you accordingly.The company is and we’ll be deferring the employer tax payments under the CARES Act into 2021 and 2022. as a result, operational cash flow will improve by approximately $18 million. Our 2020 guidance for operating cash flow has not incorporated this favorable payment deferral into our operating cash flow forecast or guidance.I’d like to now turn the call back over to Chuck. Thank you.

Thank you, Susan. Now, let’s move to slide 9 to touch on LOGCAP V. on March 3, we received a notice to proceed from our client and began to transition the Set-the-Theater planning in earnest to CENTCOM and INDOPACOM AOR task orders that Vectrus was awarded as part of our position on LOGCAP V. As you know, the initial value of these task orders of approximately $1.4 billion or 40% of the $33.5 billion total initial value of task orders awarded to all seats.to increase safety during the pandemic, the DoD restricted non-mission essential travel and then issued a conditions based transition plan that sets key condition, under which LOGCAP V awardees may travel for site assessments. Some physical site visits are necessary to transition, particularly Kwajalein Atoll in the Marshall Islands and some activity, we’ll wait until conditions are satisfied. We expect to have a better understanding of transition timelines in the next 45 to 60 days.With respect to the protest process, three or four protests have been adjudicated with the Army’s decision being upheld. All other legal remedies have been exhausted for these protests. Only one protest remains active. We believe the protest is winding down and should be settled in the near-term. We are working diligently to deliver flawlessly on their critical missions to the Army.Let’s move to Slide 10 to discuss our new business pipeline. As mentioned in my earlier remarks, our award activity remained solid with first quarter wins across all DoD clients. Additionally, we believe our pipeline of new business opportunities support continued growth and backlog and revenue. We currently have approximately $1.4 billion in bids submitted for new business awaiting award, which from a client mix perspective, represents our focused growth campaigns.Our bids submitted awaiting award is down from last quarter due primarily to LOGCAP V task orders moving into backlog. Additionally, we have identified opportunities of $8.8 billion that we plan to bid over the next 12 months. While the timing of awards is difficult to predict, we are confident in our ability to successfully compete for business in our approximately $10 billion new business pipeline.Let’s move to slide 11 to discuss our strategic execution. Vectrus is transforming into a larger scale, higher value differentiated platform by understanding our client’s need to move from traditional way of operating their facilities, supply chains and networks to a much more instrumented and converged approach. The strategy underlying this transformation centers around three core elements, enhance the foundation, expand the portfolio and add more value. The results we have delivered in enhancing our portfolio and client mix the success of our campaigns and expanding share with our clients, and our team’s talent and ability to provide thought leadership, prove that our capabilities are growing and our thesis is working.As I mentioned earlier, our key 2020 to 2021 priorities against the backdrop of the pandemic and our dedication to the protection of our team and clients are viable and achievable. This is particularly true as the DoD has already taken action to support the U.S. defense contracting community providing guidance on managing COVID-19 impacts on defense contracts, including contractual mechanisms to address cost, schedule and performance impacts and other actions to provide liquidity to federal contractors and their suppliers.We appreciate the DoD support of the defense industrial base and expect this to help alleviate any effects of program disruptions or other impacts from the pandemic. Our media priority remains effecting a flawless LOGCAP V transition and both CENTCOM and INDOPACOM AORs, leveraging the investments we have made to support this growth and continuing to deploy capital on strategic M&A and organic pursuits.Further in 2020, we continue to implement enterprise Vectrus. Driving forward from 2019 expedited pace of this and other internal investments in order to enhance our capability and foundation to support our expectation of future volume growth. Enterprise Vectrus has planned to contribute to margin expansion through increased process discipline, cost efficiency, supply chain leverage and technology enhancements on both our programs and support functions.The processes that were hardened in 2019 are now expected to contribute to EBITDA margin expansion in 2020. We will continue to insert operational technologies into our new and existing programs as we take advantage of converged infrastructures such as advanced perimeter security and many other technology-enabled solutions.Our clients focus centers on delivering seamlessly for the army, advancing our successful growth campaigns with the Air Force, the Navy and the intelligence community while leveraging our presence around the globe to build and execute an international pipeline of opportunities and we will continue to explore opportunities to make strategic acquisitions, to expand client sets and capabilities, and to strengthen our leadership in the converged market. Vectrus, as a well capitalized business, is in an advantageous position to opportunistically acquire in the current environment.2020 has brought challenges to our industry and to the entire world. Vectrus is purpose built to deliver and support infrastructures that are critical to ongoing missions during normal times and times of crisis. Our job until the pandemic eases is to continue to protect our people, our clients, and their missions while staying focused on the opportunity to lead in converged marketplace.I want you to again, thank our teams for their diligence and the face of increased diversity and their continuing dedication to support of our service men and women in their critical missions around the world.Now, I’d like to turn the call open for questions.

Thank you. [Operator Instructions] Our first question comes from Chris Van Horn with B. Riley. please proceed with your question.

Good afternoon everyone. Thanks for taking my call and hope everyone’s doing well.

Doing fine, Chris. how are you?

Great, thank you. So, I just wondered if you could comment on the contract activity. I know you mentioned $20 million to $25 million impact to revenues. Is that due to deferrals of programs, is there any cancellations that you’re hearing and how the kind of real-time process for work is going.

Now, we’re not seeing cancellations at all. In fact, the demand base is strong, the activities on the bases are continuing to mount, but the realities are that there is limited access to the various bases. We do anticipate when we begin to move back to more normal crewing that we’ll have an opportunity to claw that revenue back.

Okay. Got it. from a competitive standpoint, are you seeing any change in the competitive landscape due to this, the small disruption? Is there the smaller competitors; are they not showing up and anything from a competitive perspective?

Not really. We continue to see strong demand in the marketplace. Our clients are continuing to issue proposals. We continue to respond and as you saw from the prepared remarks, we are continuing to receive our fair share of awards.

Got it. And then you’ve been able to keep your costs under control, especially in the SG&A line. As you have – as you increase these bids plan to submit, do you need to invest further in SG&A [ph] or do you think your you know, your right sized where you are now?

As we talked quite a bit last year, we’ve made and continued to make investments in our business. As our business continues to grow, we’re creating more operating leverage and providing us additional opportunities to invest. So, at this point in time, I really like where we are. We’re in the middle of implementing our new enterprise systems that we talked about for the last couple of years. And again, we’re just continuing to work with our clients to get LOGCAP transitioned and continue to expand our revenue base and capabilities accordingly.

Okay. Got it. I’ll pass it along. Thank you so much for the time, and stay safe and healthy.

Thank you. Same to you. Thanks for the questions.

Our next question comes from Joe Gomes with NOBLE Capital. Please proceed with your question.

Good afternoon, congrats on the quarter and thanks for taking my questions.

Thank you, Joe.

Just real quick on the LOGCAP protest, my thought last time we spoke with the expectation was that that was going to be wound up in April. Is this delay kind of COVID-related or is there something else that’s come up that has pushed this date out?

That’s a good question. So, three of the four protests have been adjudicated and the timeframe for those three protests to appeal has passed. The fourth protest is tied up and what I’ll call administratively. the judge assigned to the case has been required to focus on other non-protest related activities and so as soon as he can get back to his docket, we would assume that protest would proceed. And again, as I indicated in my prepared remarks, I do believe that we are in the kind of the end stages of the process.

Okay, great. on deck, any timing as to when that will be awarded?

It continues to push a bit to the right. I don’t know that I would say that it’s COVID related or not. So, we do not have a timeframe. We are continuing as you saw in the prepared remarks to process project extensions, which we always like, obviously, but I would assume that it would be in the 2021 at this point in time. But again, I don’t want to – I don’t want to project anything that’s not official.

Okay. And COVID, you see what you’ve discussed in the second quarter probably having a $20 million, $25 million impact on revenue, in the first quarter specifically and then I guess, somewhat into the second, I mean, if you had to assume additional expenses COVID related, and if so, how has that impacted margins, if at all?

We’ve worked very closely with our clients and as I’ve indicated in our prepared remarks that our clients are doing a phenomenal job working with us and the entire industrial base to make sure that we can keep contracts aligned to operating realities and costs aligned to revenue. So at this point in time that reduction in revenue is predominantly related to base access. The workload is continuing to grow and we fully expect once we get back to a more normal crewing on our particular contracts that we’re going to work with our clients to claw as much of that workload back as possible, because again, it is existing demand that demand is currently funded and the work is still required.

Okay. And one last one from me, in the fourth quarter you guy at fourth quarter call, you’d talked about there had been some delays in cash collections, but that had been resolved in Q1. Given what’s going on here now any particular negative impact on cash collections as you see it in the first quarter so far here into the second quarter?

Again, I mean, there are complexities out there. So, I don’t want to minimize the complexities. But our clients are very actively working with ourselves and for that matter, everybody in the industrial base, and so Susan, unless you’ve seen something I haven’t, I think we should still continue to see the pace of invoice of the collection that we’ve historically seen.

Yes, I agree. Our customers have been basically bending over backwards to work with us and to make sure that, that they’re working with the industrial base to make sure that we’re there to support them.

That’s good news. Thanks for taking the questions and congrats, again.

Appreciate it. Thank you for the call.

Our next question comes from Joe DeNardi with Stifel. Please proceed with your question.

Hey, Chuck, Susan, this is John on for Joe. Good evening.

How are you?

Doing well. First question, Chuck, I want you to kind of put on your prognostication and just kind of talk to us about how you see the outbreak changing the customer’s approach to the converge infrastructure. Is this going to accelerate demand for this? Is this going to maybe, be a limit? How are you guys approaching the outbreak relative to your converge infrastructure outlook?

Well, first of all, the safety of our employees, of our contractors, of our clients remain paramount. I do see that as we continue to move forward with the operating procedures that have been put in place over the last several months, we may actually see an opportunity to provide additional ways to insert technology and keep people, if you will off of frontline, where they may not need to be. So, it’s an insightful question. Its questions that we continue to pose to our clients and as you know, is any industry transformed that converges over time. There are certain events that may at time cause the activity to be to move along a bit quicker. So, I don’t want to project that to happen, but there certainly is an opportunity for us to work in new and different ways to keep not only our people safe, but our clients safe as well.

Okay. Your competitors have had different color on the awards environment. Is there anything you can share about what you’re seeing with some of your key customers? For instance, how the Army has been awarding work versus the Navy or the Air Force?

We actually see a very consistent OPTEMPO if you will, across our clients set. As you know, we are very purpose built to do what we do. We operate military facilities, networks and IT networks and that business is quite stable and in demand. So we see, again, a good OPTEMPO on the part of our clients. I think that the Deveselu example, the recent award is a really good example that the client worked very hard with us to find innovative ways to safely, I’ll stress safely get our people to where they needed to be to conduct site surveys and so forth. So again, I think their response has been even, I think our clients are prudently working with the industrial base to make sure that we can continue to advance the various missions that we’ve either been awarded and/or currently operating.

Perfect. And then just one last question, Chuck, when you guys look out at the current M&A environment, I presume you guys aren’t necessarily getting ready to go out there and make any acquisitions, but is this providing you an opportunity to maybe, reassess the marketplace and pursue things that perhaps you weren’t considering as maybe, three months ago?

Well, we have and we continue to actively to assess M&A opportunities. And again, as I’ve indicated on multiple occasions, we’re not in the M&A business for scale. We’re in the M&A business to both expand our client and capabilities. So as opportunities arise, as opportunities arise that we believe are going to create economic value for Vectrus, we’re always assessing those opportunities, and when the right things are presented to us, we move. So again, obviously, we have a different backdrop and we understand that backdrop. But we also – as I’ve mentioned in my prepared remarks, we main very focused, focused on the execution of our strategy.

All right. Thank you very much and great quarter.

Thank you. We appreciate it.

We have reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to Chuck Prow, Vectrus’ President and Chief Executive Officer for closing comments.

Thank you very much and thank you for joining the call today. We’ve enjoyed it. It’s an interesting environment out there. So, please stay safe and we look forward to talking to you at the end of the next quarter. Thank you.

This concludes today’s conference. You may disconnect your lines at this time and we thank you for your participation.