Vectrus, Inc. (VEC) CEO Charles Prow on Q4 2020 Results - Earnings Call Transcript
Vectrus, Inc. (VEC) Q4 2020 Earnings Conference Call March 2, 2021 4:30 PM ET
Company Participants
Michael Smith - Vice President of Corporate Development and Investor Relations
Charles Prow - President and Chief Executive Officer
Susan Lynch - Senior Vice President and Chief Financial Officer
Conference Call Participants
Joseph DeNardi - Stifel, Nicolaus & Company, Inc.
Joseph Gomes - NOBLE Capital Markets, Inc.
Operator
Thank you for joining us for Vectrus Fourth Quarter and Full-Year 2020 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Demmin, and I'll be the operator for today's call. At this time, all participants have been placed in a listen-only mode. Following the management’s presentation, I’ll open the call for Q&A session.
With that, I'd like to pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations and Corporate Development at Vectrus. Thank you. You may begin.
Michael Smith
Thank you. Good afternoon, everyone. Welcome to the Vectrus fourth quarter and full-year 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 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 non-GAAP metrics, including adjusted operating income and margin, EBITDA and EBITDA margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials and press release.
At this time, I'd like to turn the call over to Chuck Prow, President and Chief Executive Officer.
Charles Prow
Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today.
Please turn to Slide 3. We ended 2020 on a strong note, achieving several important milestones in the fourth quarter. These accomplishments would not have been made possible without the dedication of the more than 15,000 combined employees and partners of Vectrus. I'd like to thank our entire workforce for their fortitude throughout the pandemic and commitment to delivering high operational readiness in support of our clients' critical infrastructures and missions across the globe.
Our fourth quarter and full-year 2020 results reflect the operating and financial resiliency of our business model, which includes the ability to generate strong cash flow. We generated $26 million of cash from operations in the quarter and $64 million or 140% net income conversion. Our ability to generate substantial cash from operation remains an important characteristic of our business.
For the fourth quarter, we reported revenue of $355 million and adjusted diluted EPS of $1.18. Revenue and EPS in the quarter were impacted by $26 million and $0.10 respectively due to COVID-related Host Nation and Base Access restrictions. We delivered full-year revenue of approximately $1.4 billion, which was up 1% year-over-year despite a $63 million or 4.6% headwind associated with COVID. Additionally, the continued execution of our enterprise-wide performance improvement initiatives and focus on program delivery yielded a record fourth quarter adjusted EBITDA margin for Vectrus of 5%.
During the fourth quarter, we continued to grow our backlog, which now stands at $5.1 billion, up 84% year-over-year and an all-time high for Vectrus. This was partially driven by the recent $882 million recompete win of our OMDAC-SWACA contract significantly improving our visibility over the next five years. We also achieved several milestones in our converged infrastructure journey by winning a prime contract for the Navy smart warehouse 5G initiative, while further expanding our capabilities through two key new acquisitions.
Finally, looking into 2021, we expect to generate strong top and bottom line results representing 20% revenue and 23% EPS growth. We believe our strategy, strong backlog, pipeline and targeted campaign will continue to drive solid financial results.
Please turn to Slide 4. As we have discussed, our strategy is to be a leader in the converged infrastructure market and capture the opportunity to transform Vectrus into a larger scale, higher value and differentiated platform. This transformation remains grounded in the understanding of our clients need to move from a traditional way of operating their facilities, supply chains and networks to a much more instrumented, predictive and converged approach.
We have leveraged our experience and how installations are being supported today with our clients should prepare for the future by providing thought leadership to the marketplace. This includes how operational technology and converged infrastructure can play a role in transforming the operation of client missions.
Building on our thought leadership, we have also made internal investments, engaged in partnerships and focused on inorganic activities to expand our strategic position in this market. For example, over the past three years, we have extended Vectrus’ maintenance of facilities to the electronic protection and security of facilities and increased our sensor integration, infrastructure, instrumentation and perimeter security solutions. Additionally, we have created the Vectrus resiliency program initiative to bring targeted, integrated, innovative, smart, secure and energy efficient technologies and capabilities to our clients’ infrastructures.
Vectrus’ thought leadership significantly enhanced capabilities and strategic focus over the past several years with recently recognized two important strategic wins associated with the DoD's 5G initiatives.
First, Vectrus was awarded a three-year prime contract for Naval Base Coronado 5G Smart Warehouse. Under this effort, Vectrus will provide industry-leading inventory management, network security, robotic material moving and environmental sensing capabilities. The objective of the project is to develop a 5G-enabled Smart Warehouse focused on transhipment between shore facilities and naval units to increase the efficiency and fidelity of naval logistics operations.
Second, Vectrus was part of the team that was awarded a Testbed contract to modernize the Marine Corps Logistics Warehouse in Albany, Georgia. For this effort, the team is working on private wireless deployment for industrial IoT automation, which would support a broad set of smart warehouse use cases, including barcode scanning and holographic augmentation and virtual reality applications. The awards are part of the DoD's 5G experimentation and testing at five U.S. military test sites, which have been earmarked $600 million and represents the largest full-scale 5G test for dual-use applications in the world.
Together, these projects provide a bed for testing, refining and validating emerging 5G-enabled technologies and broader converged infrastructure solution sets. While we expect the initial contribution from these contracts to be small in value, the wins are significant and replaces Vectrus in a market where digital solutions are now being applied within traditional facility and base operations and IT services and importantly represents our client's continued migration towards converged infrastructure operations.
Please turn to Slide 5. Over the past few years, we have made great progress in delivering strategic and financial momentum to our defined strategy three core elements, enhance the foundation, expand the portfolio and add more value. We have significantly enhanced the foundation of our business in December 2020, when the recompete of our second largest contract OMDAC-SWACA.
Under this five-year $882 million contract, we will continue to provide uninterrupted support, reliability and protection of this large and dynamic network in support of the forward deployment in Southwest Asia. This contract represents 30 years of support to this important mission. This award further builds on our 2019 successes, including winning the largest recompete and contract in our portfolio LOGCAP V.
These two successful recompete represent approximately 50% of our 2020 revenue and are now in backlog and provide substantial revenue visibility for the next five years. Additionally, no other contract in the portfolio makes up more than 10% of our revenue as such we expect minimal recompete risk in our portfolio over the next several years.
As the chart on the left-hand side of the page indicates, our recompete wins organic and inorganic growth that resulted in a record high backlog of $5.1 billion. Our backlog represents 3x our 2021 revenue at the midpoint.
Please turn to Slide 6. Expand the portfolio component of our strategy continues to evolve with new clients, capabilities and solutions that are transforming our business. Our targeted growth campaigns are pivotal to this effort and we continue to make great progress executing our Navy growth campaign, which is harnessing capabilities across the Vectrus portfolio to deliver innovative technology-based solutions while improving mission effectiveness.
The results of this campaign are seen in our financial results with Navy revenue increasing 22% year-over-year in 2020. Notable wins during the year include a new eight-year $210 million firm-fixed price contract to provide base operations support in Bahrain. Additionally, we were awarded an eight-year $45 million firm-fixed price contract to provide base operations support at the Naval Support Facility in Romania. We also won a $196 million five-year recompete contract to continue base operations support services at Naval Station Guantanamo Bay.
Finally, Vectrus joint venture was awarded a $154 million seven-year firm-fixed price contract to support the U.S. Naval Academy. Our Navy facility and base operations growth campaign has resulted in more than a $0.5 billion of prime contract wins.
The pie chart on the left side of the page illustrates the progress we have made expanding and balancing our portfolio. Notably, these numbers do not include two recent acquisitions, which further provide diversification to our portfolio.
Please turn to Slide 7. Our pipeline of new business opportunities also represents our efforts and continuing to execute targeted growth campaign and further balance our portfolio. Our new business pipeline currently exceeds $11 billion, a significant increase from $7.5 billion in 2016. This increase is partially driven by our expanded capabilities, which are generating additional opportunities across federal, non-federal and international client bases.
Our pipeline also supports the shift to more advantageous contract types and higher margin solutions. In terms of timing, we are continuing to see solicitations and awards progress at a normal pace while the timing of phases has been elongated due to COVID-19 dynamics. Overall, we remain confident in our ability to successfully compete and win our fair share of new business.
Please turn to Slide 8. While our expanded capabilities are yielding increased opportunities and new business pipeline, we have also been successful leveraging our capability advancements to drive technology insertion into our core facilities and IT offerings enabling us to win important new awards, which also support future margin expansion.
For example, recently Vectrus was awarded a position on a Best-in-Class General Services Administration multiple award contract, IDIQ vehicle known as OASIS. This vehicle provides integrated professional services for all government customers worldwide. This award demonstrates our increased ability to function as a prime contractor in large scale IT as well as our traditional markets.
OASIS provides access to new funding streams that enable us to bid on task orders accretive to our pipeline. Additionally, during the year, we were awarded a U.S. Navy contract to provide concepts and develop prototype software to integrate disparate onboard sensors to support signal discovery and integration. We were also awarded an OTA contract to provide software and engineering to support sensor data integration and visualization of the U.S. investments and national security equipment to the joint services.
Furthermore, Vectrus was awarded a strategically important five-year firm-fixed price IDIQ to provide intrusion detection, system supplies, hardware and services at Edwards Air Force Base. These wins were all based on our differentiated capabilities and position in the marketplace.
Please turn to Slide 9. The inorganic dimension of our business model is founded on making strategic acquisitions and will expand clients and capabilities to strengthen our leadership in the converged infrastructure market. In 2018, we acquired a pioneer in the Internet of Things with core competencies and sensor integration and perimeter security solutions.
In 2019, we acquired a leading provider of integrated electronic security systems. In December of 2020, we acquired Zenetex and HHB, which adds several capabilities and advanced our ability to deliver a more integrated and comprehensive suite of solutions to our clients globally.
Strategically, this brings integrated security capabilities that provide systematic protection across the physical and digital spectrum, enhancing our vertically integrated and accredited network security technology platform, protecting tens of thousands of facilities and assets. Additional capabilities include comprehensive solutions for assisting and planning, engineering, designing and implementation of IT embedded solutions and streamlined facility management and maintenance.
We are also excited about the higher end logistical capabilities these acquisitions bring, including all aspects of skills and services to establish, execute and maintain logistics policies, processes and procedures. Furthermore, we are strengthening our asset management, property oversight, supply chain and inventory monitoring. In aggregate, these services will substantially augment our current logistics expertise.
A major focus within our strategy is to expand Vectrus’ content on client facilities via Zenetex. We have materially advanced this effort by providing full-spectrum maintenance, repair and overhaul services for legacy and next-generation aircraft. For example, at Fort Bragg, Vectrus Operational Logistics Readiness Center while Zenetex is responsible for the maintenance of various aircraft. This combination increases our continent footprint, giving us further insight into many missions on the base and improving our clients’ operational visibility and awareness.
From a client perspective, both companies broaden our access to the highly attractive intelligence community clients. It is important to note that Zenetex and HHB work together in the intelligence community market today, and the expanded opportunities under Vectrus to reach our existing clients open the aperture to even greater growth.
Finally, one of our client campaigns include growing our foreign military client portfolio, which will be bolstered by the Zenetex legacy and foreign military sales supporting more than 40 countries. This includes logistics and training support to the DoD in four nations for the F-18, the H60, the C-130 and Harpoon Weapon Systems. Importantly, the company has also been able to build on those logistics and FMS capabilities to position for future growth.
For example, in late 2020, the team was awarded a prototype project to create an international readiness software system utilizing state-of-the-art predictive analytics and artificial intelligence techniques to analyze data and improve readiness initiatives, accelerate product delivery and optimize the reliability of operational and aviation readiness for foreign partners.
I am excited to welcome the more than 2,000 Zenetex and HHB employees to Vectrus. The capabilities of both companies creates a stronger platform from which we can deliver fully converged solutions across all of our client's missions.
Now I'd like to turn the call over to Susan Lynch. Susan?
Susan Lynch
Thanks, Chuck, and good afternoon, everyone. Turn with me to Slide 10 to discuss our fourth quarter results. Fourth quarter 2020 revenue was $355.3 million down $9.9 million or 2.7% year-on-year. The COVID-19 pandemic deferred approximately $25.8 million of revenue, resulting in a 7.1% impact on revenue growth. The COVID impact was caused by client base access restrictions and other pandemic-related delays and work being performed. Revenue increased sequentially $2.9 million or 0.8% as we worked seamlessly to adapt to our client's restrictions and new deployment quarantine requirements.
Adjusted EBITDA was $17.9 million, a margin rate of 5%, margin was up 10 basis points year-on-year and 20 basis points sequentially. This robust margin rate is the highest since we've been a public company and is an impressive accomplishment as EBITDA margin includes an estimated 10 basis points of COVID-19 impact. This record performance reflects our continued focus on process efficiencies, cost management, our ability to leverage our supply chain and continued technology enhancements.
During the year, Vectrus performed a functional transfer pricing analysis focusing on services being provided to U.S. military bases that are located in foreign countries. Based on this analysis, in the fourth quarter, Vectrus recognized a tax benefit in total of $7.1 million. $2 million, $2.5 million and $2.6 million relate to the years, 2018, 2019 and 2020, respectively. As a result, the company also reduced its uncertain tax position by the same amount.
Diluted earnings per share in the fourth quarter of 2020 was $1.42. Adjusted earnings per share excluding the favorable tax benefits associated with 2018 and 2019 was $1.18, up 21% year-on-year. Adjusted EPS includes a $0.10 impact from COVID. Excluding the favorable tax benefit associated with 2020, adjusted earnings per share was $0.96, up 3% year-on-year and up 8% sequentially. EPS growth was driven by lower interest expense as a result of favorable operating cash flows and CARES Act deferrals both of which resulted in lower usage of the company's revolving credit facility.
Moving on to Slide 11. 2020 revenue was $1.4 billion, up $13 million or 1% year-on-year. The COVID-19 pandemic deferred revenue of approximately $63 million and had a 4.6% impact on revenue growth. 2020 adjusted EBITDA was $56.3 million or 4% compared to 4.3% last year and was in line with our guidance as we met the operational challenges of the COVID-19 pandemic.
Most of the COVID-19 impact was high-margin work that customers delayed due to limited base access and social distancing restrictions and affected adjusted EBITDA by approximately 20 basis points. Adjusted EBITDA for the year was also affected by a Q2 2020 contract adjustment to a European program and one-time closeouts. We are pleased to report that the European program has been operating in line with our expectations as we previously discussed.
The adjusted tax rate for 2020 was 16.9% and excludes the aforementioned tax benefit for 2018 and 2019. On a pro forma basis excluding the cumulative tax benefit in its entirety, the adjusted effective tax rate was 22.9% as compared to 22.8% in 2019. Diluted earnings per share for 2020 was $3.14. Adjusted earnings per share was $3.07 and was flat to last year. 2020 adjusted earnings per share had a $0.22 tax benefit pertained to 2020. Excluding the $0.22 tax benefit, adjusted EPS was $2.85 exceeding the high end of our guidance after reflecting the previously mentioned items and a $0.39 impact from COVID-19.
Turn with me now to Slide 12. Fourth quarter 2020 total backlog was $5.1 billion, a record for Vectrus and an increase of 84% year-on-year. Total backlog was up 35% sequentially driven by the $882 million OMDAC-SWACA recompete win and the two acquisitions. Funded backlog was approximately $850 million compared to $707 million last year. The company's trailing 12-month book-to-bill ratio was 2.1x. Taking into account our recent wins under protest, our pro forma total backlog is $5.5 billion and our book-to-bill is 2.4x.
Moving on to Slide 13. Net cash generated from operating activities in 2020 was $64.1 million compared to $27.6 million in 2019. The company benefited from the CARES Act tax deferrals by approximately $13.2 million. Excluding the impact of the CARES Act, operating cash flows were $50.9 million, a record for Vectrus with operating cash flow conversion to adjusted net income ratio of 140%.
Total debt at year end was $179 million, up $108.5 million from the prior year due to borrowings associated with the company's two acquisitions on December 31, 2020. The company's leverage ratio was approximately 2x well below our covenant level of 3.5x. Cash at year end was $66.9 million up $31.6 million over prior year. Net debt was a $112 million.
At the end of the fourth quarter in conjunction with the acquisitions, we expanded our credit facility, increasing the amount of funding available under our revolver from $120 million to $270 million, while expanding our leverage ratio from 3x to 3.5x. This improved facility is indicative of our strong financial position. Our total liquidity is over $220 million.
Moving now to Slide 14. In 2021, we will continue to phase in LOGCAP V and expect our record of solid revenue performance, margin expansion and EPS growth to continue. Our revenue guidance is $1.645 billion to $1.715 billion, reflecting year-on-year growth of 18% to 23%. The low-end of this range reflects a conservative view on the timing of full operations on LOGCAP V along with elongated COVID-19 base access restrictions.
The high-end of our range includes reduced COVID headwinds and continued success in our targeted campaigns, winning and phasing in new business. We continue to drive margin performance in our business and expect 2021 adjusted EBITDA margin in the range of 4.6% to 5%, a 60 basis point to 100 basis point improvement over 2020 performance.
Our path to higher EBITDA margin will continue to be a focus as we integrate our recent acquisitions and continue organic expansion associated with our targeted campaigns and new business pipeline. Additionally, we expect to see the benefits from the implementation of our new enterprise IT platform, which is streamlining, modernizing and automating our core processes. The outcome of these priorities is starting to become visible in our financial results and are reflected in our 2021 guidance.
Our estimate for 2021 interest expense is approximately $8 million up from $4.8 million in 2020 as a result of the increased debt associated with the previously mentioned acquisitions.
Depreciation and amortization is anticipated to be $17 million up $9 million primarily due to the two acquisitions. Please note that we are in the process of completing the purchase accounting for these acquisitions and our amortization estimate could change. The 2021 tax rate is estimated at 19%, which is a four point improvement over our historical effective tax rate due to our successful efforts in improving our tax efficiencies.
Our 2021 adjusted diluted earnings per share guidance is in the range of $3.48 to $4.08, representing a 23% growth rate at the midpoint. Excluding the additional amortization as a result of the two previously discussed acquisitions, adjusted EPS guidance is in the range of $4.03 to $4.63. Diluted shares outstanding are estimated at 11.9 million shares. In 2021, we expect revenue, adjusted EBITDA margin and adjusted EPS to demonstrate improvement over what we saw last year.
In the first quarter, we expect margins to show year-on-year improvement, but dipped from the fourth quarter of 2020. We anticipate our 2021 revenue and earnings per share to be higher in the second half of the year as we work towards being fully operational on LOGCAP V. For 2021, we expect net cash provided by operating activities to be $55 million to $65 million. Operational capital expenditures guidance is approximately $5 million up slightly year-on-year. Finally, 2021 mandatory debt payments are $8.6 million.
Now I'd like to open up the call for questions. Thank you.
Question-and-Answer Session
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question.
Joseph DeNardi
Thanks. Good evening. Chuck, I think it seems like the revenue guidance implies about 5% or so, I think organic at the midpoint. Correct me if I'm wrong. But can you just talk about maybe the cadence through the year, just trying to understand what the growth rate could be towards the end of the year once you're more fully ramped on LOGCAP and past the COVID headwinds?
Charles Prow
Yes. Now you have the math approximately correct. First of all, how are you doing? Thanks for joining the call today.
Joseph DeNardi
Yes. Thank you.
Charles Prow
We have intentionally put what we think to be conservative guidance with regard to revenue because the reality with regard to COVID and the headwinds associated with the COVID particularly in INDOPACOM are still a bit uncertain. So the revenue guidance contemplates fully transitioning to the CENTCOM AOR operations in midyear. And we – although we do have some smaller task in INDOPACOM, this guidance does not contemplate us transitioning to Kwajalein until 2022. And when you net it all out, that's about $120 million to $160 million potential COVID headwinds. In the year, however, we're working through our host nations contacts and with our clients to do what we can to continue to move transition of Kwajalein to the left. And it's highly dependent upon vaccines.
And you saw today, the President just announced some good news on vaccines. So short story is, conservative view of revenue largely driven by LOGCAP transition in INDOPACOM and we'll update that you and everyone else as we learn more as the year progresses.
Joseph DeNardi
Okay. That's very helpful. Is there another way of saying that there's an additional $120 million to $160 million of LOGCAP revenue coming in 2022? And do you actually have visibility into getting ramped on that just relative to COVID and getting vaccinated and that sort of thing, maybe more visibility than you had three months ago?
Charles Prow
It's not all LOGCAP, but there are a number of puts and takes with regard to COVID-related base access restrictions. But big muscle movements predominantly driven by INDOPACOM, predominantly driven by Kwajalein, and yes, the more quickly we can get vaccinated and we're making good progress on that. The more likely we are to be able to work with our host nation partners and our clients to expedite the movement of Kwajalein implementation because again, we currently contemplate beginning transition in Q4 and going to full operational capability in 2022.
As you know, I mean, that's a big chunk of revenue. And so if we're able to work with our host nation partners and our clients to move that to the left, it could have a substantial impact in 2021.
Joseph DeNardi
Okay. That's great. I'll hop back in the queue. Thank you.
Charles Prow
Perfect. Thank you.
Susan Lynch
Thanks, Joe.
Operator
[Operator Instructions] Our next question comes from the line of Joe Gomes with NOBLE Capital. Please proceed with your question.
Joseph Gomes
Good afternoon, Chuck, Susan. Nice quarter. Congrats on the recent awards and acquisitions.
Charles Prow
Thank you. How are you doing?
Joseph Gomes
Doing well here. Can't complain too much. I have a couple of big picture type of questions for you. So in the DoD budget, I think finally you’ve got the continuing resolution at the end of the year. Were there any surprises either positive, negative for you guys from the operations and maintenance funding? Or anything that stuck out there that you were considering initially?
Charles Prow
I wouldn't say – I would say, budgetarily, no, it's pretty much what we expected, I will say. When you take a look at the budget and you look at what you can see publicly in terms of the OPTEMPO in the INDOPACOM region, it would appear that the new administration working through the Department of Defense is continuing to focus on activity in the INDOPACOM region and backing that up with real action in the region. So while big muscle movements on the budget, not much surprise, but the activity and the focus on the discussion around INDOPACOM continued to be very consistent on the part of the new administration.
Joseph Gomes
Okay. Thanks for that. On the smart warehouse, you talked a little bit about the Naval Base Coronado and the one in Georgia. Big picture, again, I mean, what can this mean? What's the end game here in terms of how big of a market here? Are we potentially exploiting with all of this smart warehouse and 5G stuff that they're currently testing and what kind of timing do you guys think that it goes from a testing to let's call it implementation?
Charles Prow
So we should look at two predominant tracks to your question. The first track is in our traditional base operations and supply chain marketplaces, this demonstrate a continued move to what we've been calling the converged infrastructure. Our clients are going to expect us to operate facilities and supply chains in a much more instrumented and predictive way. And these awards continue to demonstrate our client's commitment to that path. We think that we will continue to insert this technology into our current projects and then into new proposals at an expedited rate over the next couple of three years. That's kind of track one.
Track two is as I fundamentally believe and as you know, we've been talking about this now for a couple of years. We're going to see some much more pointed and/or tactical procurements focused on different types of facilities and supply chains that will be markets that may have not been addressable by Vectrus in the past. So we really – and by the way, acquisitions like Advantor, Zenetex and HHB really further our access to these new channels. So new channels will begin to emerge and we see that now in our pipeline, as well as the way we actually operate and propose our traditional markets, they are going to continue to change. There's no going back because 5G enables more efficient, more effective operations. And as you know, since we've met each other few years ago now, we've been on this path and we're going to continue to stay on the path on an even more aggressive rate.
Joseph Gomes
Great. Thanks for that. I'll jump back in queue.
Operator
Our next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question.
Joseph DeNardi
Thanks. Chuck, it looks like you did about $475 million on K-BOSSS in 2020. The question you've been getting for probably two years now, how are you thinking about the revenue opportunity once you're fully ramped on LOGCAP between CENTCOM and INDOPACOM? What's the range you see as reasonable now that you're a little further into it?
Charles Prow
Yes. We're not going to get down to actual because there are lots of puts and takes because K-BOSSS will survive for a while and there is going to be different revenue between LOGCAP and K-BOSSS. But what we will say is that I expect a – the expected year-over-year increase in the CENTCOM AOR will materialize. As we often talk about, we have puts and takes with regard to contract transitions in the region. I would expect as we get more into the second half of this year and we can see precisely what's going to happen in INDOPACOM. Although, I know that's not your question. We'll begin to project LOGCAP revenue expectations by region. That's obviously more than 10% of our margin.
So you should see the expected increase year-over-year in the CENTCOM AOR, and we'll begin to provide more fidelity in terms of exactly the revenue on LOGCAP by AOR towards the end of this year or beginning of next year depending on how quickly we transition in the INDOPACOM AOR. Does that help?
Joseph DeNardi
Okay. It does. And you said you expect INDOPACOM to be greater than 10%?
Charles Prow
Yes. Just doing them, I would – again, I don't want to do the math on the fly here. I would fully expect both the INDOPACOM task in their aggregate and the CENTCOM task in their aggregate to be obviously CENTCOM, but to be more than 10% of revenue.
Joseph DeNardi
Okay. That's great. And then, Susan, maybe margins for the year, I think excluding the charge in 2Q and maybe the COVID headwinds were kind of high 4%, which is similar to the guidance for 2021. So can you just talk about kind of the moving pieces into next year between LOGCAP ramping the acquisitions, COVID kind of is the underlying margin once you look through that and maybe look into 2022 better than the 2021 guidance, if that makes sense?
Susan Lynch
Yes. So it's obviously something that we've been talking a lot about. And when you add back roughly the 60 basis points from the Q2 results, we pretty much come right to the low end of our guidance here, the 4%, 6% to the 5%. And we feel like the – this is obviously a wider range than what we've given in the past and it represents the high number of program transitions that we're going through where the margins tend to be a little bit lower in the beginning as we work to improve and get the margins up. So it's a little bit wider range than what we've given you in the past. We don't feel like that there's too much risk on the downside and we feel like, we really have to watch what's going on with COVID. There is a lot of high margin work that moved out of 2020. We’re hoping to recoup some of that in this summer, but we have some flexibility in that range.
Joseph DeNardi
Okay. And then just lastly, Chuck on the $2.5 billion and 7%, yes, it’s kind of a year closer, I guess. Can you talk a little bit about how realistic that target is? I would just say is that's something that your compensation should be tied to necessarily or is that more an aspirational goal and maybe provide us with maybe the path from high 4s to 7.
Charles Prow
Okay. So kind of break it down into pieces here. So this year would be essentially the midyear of the commitment. We have made a notable progress on the topline. We've done a lot of hard work on the bottom line and I would say kind of this year and early 2022 is where you really begin to do the math on how close to 7 can we get on the bottom line.
As you know, as we continue to grow our topline, we're creating cash and leverage that we need to continue to invest in our inorganic strategy. So as you begin to see us continue to make inorganic move, we're obviously going to stay focused on those higher value solutions that will allow us to kind of push along on the bottom line. So I think COVID – and obviously, second quarter of this year didn't help.
But COVID, it certainly slowed us down a bit, but I have not seen anything yet on the topline that would indicate we can't get there. And on the bottom line, we still have a lot of hard work to do, but the returns on the investments that we've made on the prior 18 to 24 months need to start showing up on a material way on the bottom line as we kind of wind through 2021 and move into 2022.
Susan Lynch
Yes. And I’ll just jump in or add on to that that the Enterprise Vectrus systems that we've implemented, we are very hopeful that we can continue to take costs out now that we've got one system and we have greater visibility. So is it that in addition to Enterprise Vectrus and all of the Six Sigma projects that we have ongoing, I think we just have a tremendous opportunity to continue to expand our margins organically and naturally, but then we also have the acquisitions. We've always said that that path to $2.5 billion with organic and inorganic, and I think the acquisitions that we're tacking on are accretive to our margin. And the fact that we posted a 5% record margin and you saw our margin in Q3, that we've continued to have that margin expansion here in the second half of the year was really quite impressive.
Joseph DeNardi
Okay. That's great. Thank you very much.
Susan Lynch
You bet. Thank you.
Operator
[Operator Instructions] No further questions left in the queue, I would like to pass the floor back over to Mr. Chuck Prow for any closing remarks.
Charles Prow
Thank you very much, and thanks for joining us on the call today. I'll just end where I started, and that's thanking the 15,000 men and women of Vectrus to include our partners on the incredible amount of diligence and innovation that they demonstrated through what was an unprecedented year. We feel very comfortable with regard to our guidance. As Joe's last question indicated, we’ve realized that 2021, early 2022 is an important segment of time in our path to 7%, and we look forward to talking to you about that as we move forward. So with that, have a good rest of your day, and we look forward to talking to you next quarter. Thanks very much.
Operator
And this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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Comments (1)
* For 2021, guidance implies organic revenue growth of 5%
* Higher margins for 2H21 and into 2022 (better mix)
* 2021 Street EBTIDA estimates appear very reasonable to conservative for the next few quarters and the year
* 2021 FCF/share should total around $4.5 to $5/share (low capital intensity business)
* Outside of two successful re-competed contracts this past year, no other contract represents more than 10% of revenue
* Net debt to EBITDA stands at a little less than 1.5x
* Valuation - cheap on a P/E (14.6x '21 and 12.1x '22), FCF/EV (7% on '21) and EV/EBITDA (9.7x '21 and 7.7x '22)
* Finally, is there interest in the company? New change of control provisions were disclosed in yesterday's 10K:"On and effective February 24, 2021, the Compensation and Personnel Committee of the Board of Directors of the Company approved and adopted an amended and restated Special Senior Executive Severance Pay Plan (the “Amended Plan”). The Amended Plan (i) increases the multiples for two executive positions from 1.5x to 2x and adds an executive position entitled to severance; (ii) changes the timing of severance payments owed to an eligible recipient from installments over time to a single lump sum payment payable within 30 days following termination; (iii) amends the definitions of termination for “Good Reason,” to include any decrease in incentive compensation by a buyer, and termination for “Cause,” to eliminate discretion by a buyer; (iv) provides for the payment of the employer and employee portions of healthcare premiums for continuing health care coverage; and (v) makes certain other editorial edits." Source: VEC 10K