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..

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..

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%..

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..

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question..

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?.

Yes. Now you have the math approximately correct. First of all, how are you doing? Thanks for joining the call today..

Yes. Thank you..

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..

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?.

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..

Okay. That's great. I'll hop back in the queue. Thank you..

Perfect. Thank you..

Thanks, Joe..

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

Good afternoon, Chuck, Susan. Nice quarter. Congrats on the recent awards and acquisitions..

Thank you.

How are you doing?.

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?.

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..

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?.

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..

Great. Thanks for that. I'll jump back in queue..

Our next question comes from the line of Joseph DeNardi with Stifel. Please proceed with your question..

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?.

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?.

Okay. It does.

And you said you expect INDOPACOM to be greater than 10%?.

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..

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?.

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..

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..

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..

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..

Okay. That's great. Thank you very much..

You bet. Thank you..

No further questions left in the queue, I would like to pass the floor back over to Mr. Chuck Prow for any closing remarks..

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..

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..