Vectrus's (VEC) CEO Chuck Prow on Q4 2016 Results - Earnings Call Transcript

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Vectrus (NYSE:VEC) Q4 2016 Earnings Conference Call March 1, 2017 5:00 PM ET


Michael Smith - Director of Investor Relations

Chuck Prow - President and Chief Executive Officer

Matthew Klein - Senior Vice President and Chief Financial Officer


Brian Ruttenbur - Drexel Hamilton, LLC


Greetings and welcome to the Vectrus Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d like to turn the conference over to your host, Mr. Michael Smith, Director of Investor Relations and Corporate Development. Thank you. You may begin.

Michael Smith

Thank you. Good morning, everyone. Welcome to the Vectrus fourth quarter and full-year 2016 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer, and Matt Klein, Senior Vice President and Chief Financial Officer. Slides for today’s presentation are available on our Investor Relations website,

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 statement 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. We assume no obligation to update our forward-looking statements.

Also, we will be making reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. You can find the non-GAAP reconciliations and other disclosures in our earnings release, and in our presentation slides, which are publicly available on the Vectrus website at

At this time, I’d like to turn the call over to Chuck Prow.

Chuck Prow

Thank you, Mike. Good afternoon, everyone, and thank you for joining us on the call. Please turn to Slide 3. Before we get started, I’d like to say that, I’m excited and privileged to have joined Vectrus at this pivotal time.

Since joining the company in December, I have visited several of our overseas and U.S. programs to meet with clients and employees. The feedback I received from clients regarding the contributions of our employees was outstanding. Vectrus employee work side by side with clients oftentimes in challenging environments supporting some of the most important missions around the world.

Our employees commitment and dedication to our client success is second to none and is one of the reasons Vectrus as a trusted partner. Overall, I believe there’s significant opportunity to build on Vectrus as a global footprint, capabilities, market positioning, and client relationship to create a higher value platform.

Now, I would like to discuss our full-year 2016 financial results and highlights. I’m happy to report that 2016 revenue, operating margin, and earnings per share were all in line with our full-year guidance while net cash provided by operating activities exceeded our guidance.

Revenue for the full-year at $1.19 billion, up $10 million year-over-year, or up 1%. Operating margin was 3.6% and was still in line with guidance despite some non-recurring one-time items in the fourth quarter. Diluted earnings per share were $2.16.

In 2016, net cash provided by operating activities was strong at $37 million, exceeding our $30 million to $34 million estimate. That payments equal $29 million for the year with $15 million being voluntary. Our total debt was $85 million at year-end, representing a leverage ratio of 1.63 times.

During 2016, we were awarded and have since successfully phased in a $21 million installation services past quarter in support of the U.S. Air Force at Al Udeid Air Base in Qatar. The task order was awarded under our Air Force Contract Augmentation Program, indefinite-delivery/indefinite-quantity, or IDIQ contract also known of AFCAP, which provides full spectrum logistics and base operations support.

Furthermore and more recently, in 2017, we announced that we were awarded another AFCAP task order in the amount of $14 million to provide installation services at Bagram Airfield in Afghanistan. We look forward to continuing to compete for task orders under AFCAP and supporting our client’s contingency mission. As a reminder, the AFCAP contract was awarded in June of 2015, it has an estimated completion date of September 2021.

Additionally, during 2016, we awarded a position on the U.S. Navy’s Global Contingency Services multiple award contract II known as GCS MAC II, which has an eight-year duration. Work on GCS MAC II will include short notice facility support services and infidel construction and support of natural disasters, military efforts, and humanitarian support for the Defense Department and other customers around the world.

Importantly, in addition to AFCAP, the GCS MAC II contract represents our second long-term IDIQ win in support of global contingency effort. While opportunities associated with GCS MAC II are difficult to forecast, given its contingency-based nature, we are pleased to be part of the effort and look forward to providing the Navy our differentiated and robust solutions.

In 2016, Vectrus was awarded the Enterprise Legacy Voice and Information Systems contract or ELVIS, which is an IT contract we have supported for almost 20 years. While ELVIS represents a small percentage of total revenue is an important strategic contract that provides integrated and reliable command and control intelligence and deployable communications support to manned and unmanned air force sites in Belgium, Germany, the United Kingdom, and Turkey.

Please turn to Slide 4. Historically, we have discussed our three large re-compete program then I would like to provide an update on the current status of each. Regarding the re-compete of our Kuwait-Base Operations and Security Support Services contract known as K-BOSSS 2.0. On November 7, 2016, we were notified by the Army that it was taking corrective action to resolve protest associated with the initial award.

As part of its corrective action, the army amended the solicitation and request to revive proposal from only the existing offer. Vectrus is encouraged by this corrective action. We look forward to delivering a robust and differentiated solution, while continuing the excellent performance our clients have consistently received on this contract.

We do not know when the army will issue an award decision. But right now that puts us on contract to March 28, 2017. Given the current status of the re-compete, the history of the solicitation and faith in period, it is reasonable to assume that our current contract could extend for some period of time.

At this time, it is our best estimate that the existing K-BOSSS contract will extend well into the third quarter, although, not a guarantee. In 2016, the K-BOSSS program contributed approximately $438 million, or 37% of revenue.

Turning to the consolidated Army Pre-Positioned Stocks 5, or APS 5 contract, which includes our current APS-5 Kuwait and APS-5 Kuwait APS-5 Qatar contracts. In the third quarter of 2016, we were notified that we were not selected for the consolidated contract and subsequently filed a protest with the Government Accountability Office or GAO.

On December 21, 2016, the GAO issued its decision denying our protest of the APS-5 contract award. We are currently proceeding with the program phase out, while ensuring our client continues to receive exceptional support from Vectrus through this transition period.

I had the opportunity to see the program firsthand well in the Middle East and our folks continue to execute the mission and provide excellent performance and service to our clients. As a matter of fact, our last performance rating issued from the Army was the highest it’s ever been. I would like to thank the government for their recognition of our performance and our employees for their amazing efforts on this program.


In 2016, the APS-5 Kuwait contract contributed approximately $181 million, or 15% of revenue. Our contract for APS-5 extend through March 2017. Regarding our Maxwell Base Operations Support program, during the fourth quarter, Vectrus was awarded a modification to the existing contract that extend its propellant period into May. We expect the Air Force to award this re-compete contract in the second quarter of 2017.

Turning to the Thule Base Maintenance Contract, as you may recall, the Air Force awarded the $411 million seven-year contract to a Danish subsidiary of Vectrus in October of 2014. After a lengthy protest and litigation period, on December 14, 2016, the Air Force directed our Danish subsidiary to begin the transition of the two-week contract.

Our Danish subsidiary have begun the phase-in period with full contract operations to begin October 1, 2017. Most recently, on January 31, 2017, the Court of Federal Claim had granted 1% protester’s motion for reconsideration to address two claims that were not expressively ruled upon in the court’s dismissal of the case in October 2016. At this time, if matter remains pending before the Court of Federal Claims.

However, Vectrus is moving forward as directed by our clients and we look forward to executing this program with the Air Force in the coming years. We added a Thule contract to our backlog in the fourth quarter anticipate revenue stream to materialize in the latter part of 2017.

I like to update you on the status of new business, which will be a primary focus for me at Vectrus. We are approximately $1.5 billion in bids submitted pending award. Additionally, we plan to submit a proposal of almost $6 billion of identified opportunities over the next twelve months all of which are for new business.

I believe there are several opportunities to strengthen our pipeline, while improving the overall probability of win. The Vectrus team has done a phenomenal job of managing the business through a challenging 2016. Our teams focus on cash collections and methodical approach to capital allocation resulted in a favorable financial position from a liquidity and leverage perspective.

It is worth noting that the company had paid down 39% of its total debt since September of 2014. We ended 2016 with a total debt of $85 million and $48 million of cash on the balance sheet. At 1.63 times debt to EBITDA, we are well below our 2016 covenant level at 3.25 times. We will continue to prudently manage your leverage profile and capital structure.

As you may know, Vectrus Improvement Project or VIP are a key component of our operational excellence initiatives. VIP’s are lean-based approaches, which are a key component of how we increase stakeholder value and differentiate our business.

In 2016, we had over 50 VIP submissions and I’d like you thank all of our employees for their outstanding efforts and demonstrating how Vectrus can improve process, increase efficiencies, and reduce cost. Your efforts are helping to differentiate Vectrus in the marketplace, while improving our overall value proposition.

Please turn to Slide 5. I have initiated a strategic process that will leverage our core facilities and logistic capabilities with our technology business. The federal facilities in logistics markets are undergoing significant pressure to transform and to deliver much better outcomes at dramatically lower cost.

Vectrus has an opportunity with our clients to be a leader in this transformation through innovation. The convergence of our clients’ physical and digital infrastructure and supply chain represent an opportunity to improve the outcomes of our client missions, while creating a higher value growth-oriented platform.

We are evolving our long-term strategy in order to take advantage of this opportunity and to shape our future. Our strategy will chart the path to establish Vectrus as an innovator and leader as our clients seek new approaches and solutions at the physical and digital aspects of the facility and logistics mission converge.

Our three core strategies enhance the foundation, expand the portfolio, and add more value will evolve to include more innovative, technology-enabled methods, capabilities and business models. Each of our core strategies will have a series of strategic imperatives, which will be rolled out at the appropriate time.

First, the core strategy enhanced the foundation, while execute a series of imperatives focused on strength – strengthening our methods and approaches and by growing in and around our base. We will expand our VIP projects to an enterprise-wide program and we will infuse new technologies and operational capabilities into our current operations and programs wherever possible. This will result in the delivery of a higher value, high impact services to our clients, while growing in and around our base.

Second, the core strategy of expanded portfolio will introduce a series of strategic imperatives designed to a, infuse technology into our current facilities and logistics business, and b, enhance a full lifecycle aspect of our current IT business. The outcome will be improved performance on current programs, well creating differentiation in our new business activities.

We will leverage our strong foundation of facilities in logistics and IT to package our existing capabilities to and and cases partner with how innovative third-party is. The net result will be a more technology-enabled differentiated in higher value portfolio.

The final core strategy add more value. While we are in a very early stages of this journey, the essence of these imperative will be to with our clients create more predictive, agile, and responsive infrastructures and supply chain. And in turn create a higher value, significantly differentiated growth-oriented business.

In short, the add more of value impaired may include introducing new higher value service offerings, strengthening our business model, and more aggressively and systematically integrating our enterprise operations. As you can see, we are repositioning ourself, which is going to be an exciting journey and I look forward to updating you on our progress.

Now, I’d like to turn the call over to Matt and he will go through our financial results and provide 2017 guidance, then we will open up the call for questions.

Matthew Klein

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 6. Today, I will be discussing our financial results for the three months and year-ended December 31, 2016.

In the fourth quarter, revenue was $288 million, down $23 million, or 7.4% compared to the same period of 2015. The decrease was due to lower revenue of $28 million from Afghanistan programs and $18 million from U.S. and European programs, partially offset by a $23 million increase in Middle East programs.

Operating income was $8.6 million, or 3% operating margin in the fourth quarter of 2016 compared to $11.3 million, or 3.6% operating margin in the fourth quarter of 2015. The $2.7 million, or 24% decrease is impacted by the year-over-year decrease in revenue and $1.5 million in additional one-time costs associated with the CEO transition.

Interest expense decreased $700,000 for the three months ended December 31, 2016. When compared to the same period in 2015 due to a lower long-term debt balance.

The tax rate increased in the fourth quarter of 2016 to 39.7% from 36.4% in the fourth quarter of 2015, and the tax expense decreased in the fourth quarter related to the revenue and operating income declines previously discussed.

Diluted earnings per share for the fourth quarter were $0.40 compared to diluted earnings per share of $0.55 in the fourth quarter of 2015. This is primarily driven by the year-over-year decrease in revenue, higher selling and general administrative or SG&A expenses, and offset partially by the lower interest and tax expense in the period.

Also, on Slide 6, the comparisons of the year-ended December 31, 2016 and 2015 financial results. The year-to-date financial results for 2015 reflect the generally accepted accounting principles financial results, but also reflect the adjusted financial results to operating income, operating margin, and diluted earnings per share, which excludes separation costs required to become a standalone public company, and one-time favorable settlement of tax liabilities. There were no adjustments to the 2016 financial results.

In the discussion today for comparison purposes, I will compare the 2016 financial results for operating income, operating margin, and diluted earnings per share to the 2015 adjusted financial results. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP.

Full-year 2016 revenue was $1.191 billion, an increase of $10 million and up 1% when compared to 2015. The increase was driven by the growth of our Middle East programs of $131 million, partially offset by the decline in revenue from our Afghanistan programs of $80 million, and U.S. and European programs of $41 million.

Operating income was $42.8 million, or 3.6% operating margin for the full-year of 2016, which is $600,000, or 100 basis points unfavorable when compared to the adjusted operating margin in 2015. This decrease is due to increased SG&A expenses, primarily due to the CEO transition in the fourth quarter of 2016, which is partially offset by income associated with the increase in revenue when compared to 2015.

Full-Year 2016 diluted earnings per share were $2.16 compared to adjusted diluted earnings per share of $2.23 in 2015. The decrease in EPS is primarily due to the impact of CEO transition expenses and increase in the number of diluted shares outstanding, partially offset by the income associated with increased revenue and lower interest expense in 2016.

Net cash provided by operating activities was $36.6 million for the year-ended December 31, 2016, which was an improvement of $17.7 million versus 2015. We closed out the year with 57 day sales outstanding, which is a year-over-year improvement of 11 days. This improvement is due to the phenomenal job by our teams in managing cash collections in 2016. We are now looking to sustain this level of DSO going forward.

Please turn to Slide 7. As you can see by the graph since the third quarter of $2014, we have reduced our total debt by $55 million, or 39%. Importantly over this time $27 million of our debt payments were voluntary. The company ended 2016 with a total debt of $85 million, which was down $29 million compared to the prior year, representing a total debt to trailing 12 months consolidated EBITDA leverage ratio of 1.63 times.

The total debt of trailing 12 months consolidated EBITDA leverage ratio covenant level for 2016 was 3.25 times, which drops to three times in 2017 and 2.75 times in 2018. We will continue to methodically manage our leverage profile on capital structure as we move through 2017.

Please turn to Slide 8. For the fourth quarter, total backlog was $2.4 billion and funded backlog was $665 million.

Please turn to Slide 9. I would like to highlight a few program assumptions that will provide insight into the 2017 revenue guidance. Although, we are currently on the K-BOSSS contract through March 28, 2017, it seems more likely but not a guarantee that the contract will extend beyond March and we have estimated in our guidance it will contribute well into the third quarter. The length of any potential extension is predicated on when the re-compete contract is awarded.

In addition, we are currently on the APS-5 Kuwait and Qatar contracts through March of this year. With K-BOSSS and APS-5 included in our 2017 guidance, we are estimating revenue to range from $910 million to $1.01 billion with a midpoint of $960 million. The 2017 revenue midpoint is $231 million lower when compared to 2016, due primarily to the impact of the APS-5 and K-BOSSS contracts previously discussed.

Due to the material nature of these contracts, changes to period of performance included in the 2017 guidance assumptions could have a material impact to the overall guidance. Thule is expected to begin full performance in the fourth quarter of 2017. The guidance for operating margin will range from 3.4% to 3.6%. As a result, the midpoint for operating margin is 3.5%.

We have made great strides in 2016 in improving operating income performance on our existing programs, driving a net favorable cumulative catch up in 2016 of $7.5 million. There are many factors that drive this performance, including successful contract modifications and extensions of current contracts. Adjustments can be positive or negative and are a normal part of this business and our guidance contemplates this reality.

Additionally, commensurate with the launch of our new strategy, we may incur some costs associated with the implementation of our strategic imperative,s which may impact margins in 2017.

Looking forward, we believe we will create a higher sustained margin profile with the successful implementation of these imperatives. We are estimating diluted earnings per share to range from $1.53 to $1.83. The midpoint of diluted earnings per share is $1.68. This assumes an estimated $11.1 million weighted average diluted shares outstanding. We estimate net cash provided by operating activities to range from $20 million to $26 million with a midpoint of $23 million.

Full-year net cash provided by operating activities is expected to be slightly above a 100% net income conversion 2017 capital expenditures are expected to be approximately $1 million. Depreciation and amortization is expected to be $2.3 million for 2017. 2017 mandatory debt payments are $15.8 million.

Interest expense is forecasted at $4.2 million, and we currently estimate a 36.4% tax rate for the full-year.

Now, I’d like to turn the call over for questions.

Question-and-Answer Session


Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brian Ruttenbur from Drexel Hamilton. Please go ahead.

Brian Ruttenbur

Yes, thank you very much. A couple quick housekeeping. D&A you just stated in 2017 was what, I did catch it?

Matthew Klein

2017, it’s $2.3 million.

Brian Ruttenbur


Matthew Klein

CapEx is about a $1 million.

Brian Ruttenbur

Okay. In 2016, how much was CapEx and D&A?

Matthew Klein

CapEx is a little less than a $1 million and D&A is very close to what we reported in 2017, there’s some more.

Brian Ruttenbur

Okay, perfect. And then what are the big rebids beside K-BOSSS, obviously, coming up, what else is out there?

Matthew Klein

That we talked about for a couple of years really now APS-5, K-BOSSS and Maxwell, K-BOSSS is still in play. Maxwell is also expected to decide really in the next month or so unless something changes. So we will get those resolved. And as a reminder, we’ve been tracking APS and K-BOSSS and they were a material part of our business over – 40% to 50% of our overall revenue streams. As we go forward, we expect to re-compete ratio to come down to a more normalized number no more than 20% of our overall revenue streams, as you look forward into 2018 and beyond. That’s a little….

Brian Ruttenbur

Maxwell rebids, I’m sorry, I interrupted, I apologize, Matt. Maxwell re-competes, when do you find out, or what you have and more importantly, what if you’ve got in the estimates?

Matthew Klein

So we expect to hear in the next couple of months to be honest. The government published a begin data, if you will of mid-May. So we could hear it any time on Maxwell, doesn’t mean it’ll play out that way. But we believe that procurements far enough along that will hear pretty soon sometime this year for sure. With constellation…

Brian Ruttenbur

In our guidance you have Maxwell through Q2 or do you have Maxwell continuing?

Matthew Klein

Through our guidance we have Maxwell through our period of performance, which is really may right now.

Brian Ruttenbur


Matthew Klein

In our guidance contemplates various assumptions on extensions, re-compete wins, and pipeline success. And we’ve got that all baked into what we’ve guided to in 2017. The big variable that we’ve tried to communicate is really the K-BOSSS situation. If K-BOSSS awards relatively quickly and there’s a change, that could change our guidance. If it continues to extend beyond what we think it’s going to be at this point, which is really the third quarter of this year, that could also push us to the upper-end of our 2017 range.

Brian Ruttenbur

Okay. And then just a couple of other, you mentioned restructuring, Chuck. It sounded like restructuring where are you going to infuse technology in the current business. Can you – just talk about that how is that going to help you on the K-BOSSS rebid?

Chuck Prow

Sure. Yes, we didn’t view – we do not use the word restructuring, if not the intent. We have initiated a series of strategic initiatives that will, as you say, allow us to infuse technologies not only into our current programs, but into the $6 billion of pipeline that we have in play.

With regard to K-BOSSS specifically, it’s a bit late for that in terms of any new business activity. But again, very aggressively we’re working with all of our existing programs to infuse technology and new operating approaches wherever we can.

Brian Ruttenbur

Great. Well, thank you very much.

Chuck Prow

Thanks, Brian.

Matthew Klein

Thank you, Brian.


[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to Mr. Prow for any closing comments.

Chuck Prow

Thank you very much, and thank you for joining us on the call today. Once again, I’d like to reiterate it’s an honor to be leading Vectrus during this pivotal time and I look forward to talking to you about our progress in future periods Thanks a lot, again.


This concludes today’s teleconference. Thank you for your participation. You may disconnect the lines at this time.

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