Thank you for joining us for Vectrus First Quarter 2021 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Sheri, 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 a Q&A session.

[Operator Instructions]. I will now pass the call over to Mike Smith, Vice President of Treasury, Corporate Development and Investor Relations at Vectrus..

Thank you. Good afternoon, everyone. Welcome to the Vectrus first quarter 2021 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on our Investor Relations Web site, 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’d 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. Please turn to Slide 3. During the first quarter, we continue to execute our strategy of making Vectrus the premier converged infrastructure company in our market.

I'd like to thank all of our employees and partners for their contributions in supporting the missions we operate around the world throughout the pandemic. Their innovation and resourcefulness are critical to our performance. We began the year with strong operating performance.

Revenue in the first quarter increased 23% year-over-year to $434 million and was supported by organic growth of 4%. The growth in revenue was driven by our recent acquisitions, continued phase-in of LOGCAP V, as well as growth in our core programs. We also improved adjusted EBITDA margin by 60 basis points year-over-year to 4.8%.

Additionally, adjusted diluted earnings per share increased 46% year-over-year to $1.20. Last quarter, we completed two strategic acquisitions that added key clients, capabilities and accelerated our converged infrastructure strategy. The integration of these acquisitions is well underway and on track.

We remain excited about the combined talent, offerings and opportunities for accelerated growth. In the first quarter, we won several important awards, reaffirming our strategy while helping to lay the groundwork for continued growth. We ended the quarter with total backlog of $4.5 billion.

Pro former total backlog was $5.8 billion and includes contracts awarded to Vectrus currently under protest. Subsequent to the fourth quarter, our $882 million OMDAC-SWACA recompete was protested with the GAO. A decision is expected in June. We remain confident in the Army's award decision.

I look forward to continuing to support this critical mission over the new five-year period of performance. Recently, the Biden administration announced that the U.S. will withdraw troops from Afghanistan. Vectrus’ revenue in Afghanistan makes up a low single digit percentage of total revenue.

Importantly, the momentum we are seeing in our core business is expected to more than offset this minimal financial impact from Afghanistan. As such, we are increasing the low end of our 2021 guidance. We are closely managing the phase-in of LOGCAP V and currently anticipate being at full operational capacity in Iraq this summer.

In terms of INDOPACOM, the phase-in process remains elongated due to base access restrictions associated with COVID-19. We anticipate phasing in later this year with full operational capability in early 2022. Please turn to Slide 4, where I will discuss market trends.

As we have discussed on prior calls, due to technological advancement and cost pressures, our clients are rapidly migrating from traditional ways of operating their infrastructures to a much more instrumented, predictive and converged approach.

The expectations from our clients are evolving to include enhanced mission capabilities, improved performance, lower cost points, and outcome-based contract structures.

At the macro level, we are seeing client examples and use cases rapidly emerging across defense, national security and federal civilian markets that supports our expectation for future growth in the converged infrastructure market.

Examples include 5G pilots, installation of the future, NASA Sustainability Center and Research Laboratory, Yokota Air Force Base microgrid and the construction of NGA West Green LEED facility. This migration has been amplified by our largest client, the U.S. Army, who recently released its installation strategy.

This is the first strategy to identify the need for modernized, resilient and sustainable installations. The strategy outlines how every installation will be a smart platform of capabilities, utilizing connected sensors to enhance operational capacity and improve the delivery of services.

The Army's goal is to modernize its 156 installations over the next 15 years. One of the Army's strategic outcomes is to enhance readiness and resiliency at its installations, which as seen on the right side of this slide, implements solutions for protection, resilience, mission assurance, education and training.

As a leading provider of integrated security solutions that provide systemic protection across the physical and digital spectrum, we believe Vectrus is well positioned to support the Army in its mission.

Increasingly, clients expect strategic outcomes to be supported by two enablers, data analytics and partnerships, both of which are part of Vectrus’ current initiatives. Overall, we believe this converged evolution will transform the federal technical services sector and yield greater addressable market to Vectrus over time.

Please turn to Slide 5, where I'll discuss how Vectrus is innovating and investing to position for leadership in this market.

As we started this journey in 2017 by constructing a go-to-market strategy and thoughtfully engaging clients; next, we leveraged our experience in how installations are being supported today with how clients should prepare for the future by providing thought leadership and white papers to the marketplace.

Then, we further enhanced our position by engaging in partnerships, creating solutions, and conducting strategic acquisitions.

Today, we are inserting operational technologies that provide real world, immediately practical capabilities into core functional services and as point solutions to deliver integrated, innovative, smart, secure, and energy efficient technologies to clients’ infrastructures.

These solutions, which you can see on the slide, includes Vectrus integrated security platform, installation of the future platform, zero trust logistics modernization architecture over 5G and Vectrus energy solutions.

All of these offerings are now represented at our refresh Vectrus.com Web site, and are either part of our current programs or being built into contracts. As a result of our strategy and execution, Vectrus is making great progress and positioning to be a leader for the next phase of growth in converged infrastructure. Please turn to Slide 6.

Our differentiated capabilities are already resulting in awards such as our work with the Navy and Marine Corps, which as you can see on the slide, is using 5G to build smart warehouses.

Our operational technologies and solutions that have been developed over the past three years place Vectrus at the forefront of 5G and converged infrastructure enablement. We plan to leverage our operational expertise and the work we are doing as part of the largest full scale 5G tests to support our clients’ migration to converged infrastructures.

Please turn to Slide 7. We continue to make progress on our deliberate campaign-based approach to growth with several important new ones in the quarter.

We were awarded a position on the GSA contract to provide facilities maintenance, energy management, water conservation, and support services as well as aerospace coating solutions to all federal agencies. This is the new route to market for Vectrus that currently sees approximately $500 million of full and open annual spending.

We plan to utilize this vehicle as we channel the market, some of our previously mentioned Vectrus solutions, while accessing new clients such as the VA, HHS and DHS.

During the quarter, Vectrus was awarded a CBRN integrated defense prime OTA contract, which was based on our well-known capabilities in sensor integration, Internet of Things, and perimeter security solutions. The award is valued at $19 million over two years and extends Vectrus' IoT, machine learning and data analytics offerings.

This effort is co-sponsored between DoD and Department of Homeland Security and provides sensor integration as well as data integration and analysis related to threat detection domestically. This program brings our digitally integrated solutions that were originally deployed overseas, to the U.S. to support protection of the Homeland.

We are proud to have been selected for such an important mission and look forward to the opportunity to bring our unique and differentiated solutions utilized by the DoD to a new client and market.

This work is illustrative of how Vectrus is inserting technology to deliver a more integrated and comprehensive suite of solutions in support of the converged infrastructure market.

Our work supporting the Air Force's most critical mission requirements was further strengthened in the first quarter with two wins under the Air Force Contract Augmentation Program or AFCAP V IDIQ contract. Given current trends, we believe our work on AFCAP V will surpass the $130 million of orders we achieved on the AFCAP IV.

Our success on AFCAP demonstrates Vectrus’ ability to support our clients’ contingency and humanitarian support requirements with a full range of facilities and logistical services across the globe.

We are pleased with the Air Force’s confidence in Vectrus to support their critical missions, and look forward to building our exemplary service and commitment to this very important program. We are also continuing to execute on our IDIQ portfolio.

And during the quarter, we won a $22 million five-year task order under the Army's ITES-3S contract to provide enterprise IT services to the U.S. Army Corp of Engineers across Europe.

This is a notable win for Vectrus demonstrating an ability to execute on our IDIQ portfolio, while leveraging our 30-year history providing complex mission critical IT services across the globe. Furthermore, this task order provides Vectrus with an opportunity to grow its presence in support of the 37,000 U.S.

Army Corp of Engineers civilians and soldiers in over 130 countries worldwide. While Vectrus is well known for its IT, O&M and network communication services in austere and challenging environments, we have significantly advanced our offering over the past several years.

Most recently, the acquisition of Zenetex brought capabilities such as IT service management design, including cloud implementations and application migration. Zenetex has worked with more than 25 government clients to plan, design and integrate IT service management solutions that are practical and maintainable.

I am pleased to announce that in our first quarter, Zenetex was awarded a $33 million four-year contract to support the Navy's technology modernization efforts including systems migration, reporting and analysis and operational support.

We are using these enhanced capabilities to increase our already robust full lifecycle IT, O&M service offerings while inserting them into current programs. Please turn to Slide 8. All wins in the first quarter represent the progress we are making in executing our long-term strategy.

We expect additional new wins in 2021 from our approximately $1.7 billion pipeline of bids currently submitted awaiting award. The outlook for future growth remains solid with $10 billion of new opportunities that we plan to bid over the next 12 months.

While timing of awards is difficult to predict, we are confident in our ability to effectively compete for business in our approximately $12 billion new business pipeline. Now, I would like to turn the call over to our Chief Financial Officer, Susan Lynch, for a review of the financials..

Thanks, Chuck, and good afternoon, everyone. Please turn to Slide 9. We are very pleased with our first quarter results and the contributions from our recent acquisitions. First quarter 2021 revenue was $434 million, up $82.3 million or 23% year-on-year.

Excluding the contribution from our two recent acquisitions, Zenetex and HHB, organic revenue growth was 4%. First quarter results were minimally impacted by COVID-19. Adjusted EBITDA for the first quarter of 2021 was $20.7 million, up 41% from last year. Adjusted EBITDA margin was 4.8%, up 60 basis points from the first quarter of 2020.

Adjusted EBITDA was up $6.1 million year-over-year as a result of the acquisitions and was up organically due to program performance and continued cost disciplines throughout the organization.

First quarter 2021 interest expense was $1.9 million, up slightly year-on-year due to a higher revolver balance throughout the quarter due to the company's two acquisitions late last year. Diluted earnings per share for the first quarter of 2021 with $1.02 compared to $0.74 in the prior year.

Adjusted EPS adding back amortization from acquired intangible assets was $1.20, up 46% year-on-year. The increase in adjusted EPS is a result of our recent acquisitions, program performance, continued cost disciplines and a lower tax rate for the period. Please turn to Slide 10.

Our strategic execution and recent acquisitions have resulted in a more capable and diverse company. Navy revenue now represents 13% of total revenue compared to 4% during the same period last year, driven by the acquisitions and organic growth.

Our deliberate and tailored efforts associated with the Navy campaign are yielding significant results with a 36% revenue CAGR from 2016 through 2020. Revenue with the Air Force now represents 18% of total revenue, and revenue at the Army now represents 59% of total revenue.

Our strategic acquisitions and execution have also further diversified our geographic portfolio. In the first quarter, our U.S.-based revenue composition grew to 35% of total revenue as compared to 23% at the same time last year. Our geographical footprint will continue to broaden as we ramp up the LOGCAP V INDOPACOM task order.

Please turn to Slide 11. First quarter 2021 total backlog was approximately $4.5 billion compared to $4.1 billion in the first quarter of 2020. Total pro forma backlog was $5.8 billion and includes contract wins currently under protest. Funded backlog was $908 million.

The company's trailing 12-month pro forma book to bill was 1.7x compared to 1.5x in Q1 2020. It is important to note that given the rapid response and contingency nature of LOGCAP V and similar IDIQ, we are expecting a greater volume of task orders that could quickly migrate from some middle status to backlog. Please turn to Slide 12.

Net cash used in operating activities in the first quarter of 2021 was $21.7 million compared to cash provided from operations of $1.1 million in the first quarter of 2020.

The operational cash flow usage in the quarter was due to strong fourth quarter collections and several program startups in the quarter that delayed collections from our historical norm. We expect operating cash flow to improve from the first quarter and project 2021 net cash from operations between $58 million and $65 million.

Cash at quarter end was approximately $38.3 million. Total debt was $177 million, down $7 million for the first quarter of 2020. Net debt was $139 million, up $101 million from the first quarter of 2020 due to the acquisitions of Zenetex and HHB on December 31, 2020. The company's total leverage ratio was 2x, well below its covenant level of 3.5x.

Please move to Slide 13. In light of our strong first quarter performance, we are increasing the low end and midpoint of the guidance range. Revenue guidance is $1.68 billion to $1.715 billion for year-on-year growth of 20% to 23%. We are increasing the low end of adjusted EBITDA margin by 20 basis points to 4.8% with a high end of 5%.

Adjusted diluted earnings per share guidance adding back amortization from acquired intangible assets is in the range of $4.55 to $4.85, reflecting year-on-year growth of 35% to 44%. We expect net cash provided by operating activities to now be in the range of $58 million to $65 million. Now, I'd like to open the call up to questions.

Operator?.

Thank you. [Operator Instructions]. Our first question is from Joe Gomes with NOBLE Capital. Please proceed..

Good afternoon. Nice quarter..

Thank you, Joe.

How are you?.

I’m doing all right. Hope you and everyone's well there. You mentioned in your prepared remarks and in the slide about a growing addressable market. And previously you had in another presentation had talked about a total addressable market of 140 billion.

Are you increasing that size or is that included in what you were talking about today?.

No. That's included in what we talked about today. And what we mentioned today is really just kind of a continued reaffirmation of the fact that we are seeing greater addressable market, both with U.S. clients as well as overseas clients..

Okay, great. Just wanted to clear that up. And obviously, I think you get asked this question every quarter, so I'll toss it out.

The goals you guys had set for the 2.5 billion of revenue and the 7% EBITDA margin, how comfortable are you still with obtaining that level?.

Yes, we talked about it at being that level in 2023 and the five-year plan. I have seen nothing to this point in time in our journey that would lead us to back away from that. Continuing to make great progress on the top line. And as you've seen, we've had a couple of quarters now really solid margin expansion results as well.

So it’s not going to be easy. We're going to work hard, but there's nothing that we've seen to this point in time that would have us back off of that commitment.

Susan?.

No, I completely agree, Chuck. That will be at the end of 2023. I think our revenue growth for the quarter was excellent. And we just kind of keep marching along with organic and inorganic growth..

Okay, great. And then kind of more on the big picture here, Chuck. We're seeing, as you mentioned in the prepared remarks, the Biden administration attempting to withdraw from Afghanistan.

How concerned are you with some of the other Middle East locations that you are on, specifically CENTCOM that the administration may start to take a look at that and want to start to wind some of that down?.

We have not seen nor heard. Both these are publicly and/or through our client channels of major architectural changes outside of Afghanistan. As I mentioned in the prepared remarks, Afghanistan is kind of a low single digit geography for us.

It's also worth noting that much of that work in Afghanistan is communications or comms related, and the exact amount of adjustment to that workload is still a bit unclear, but what we provided and we believe is a very conservative estimate.

The last point that I'll make is, is really we've seen the Biden administration really put a lot of attention to what they call their pivot to Asia. And as you know with our position in INDOPACOM, both with LOGCAP and other contracts, we feel well positioned for that shift as well. So there are changes, as you know.

Most of our revenue comes from the O&M line and the budget, which tends to stay pretty stable. So we're feeling at this point in time like we have a good sense of what’s coming our way from a budgetary perspective..

Great. Thank you for taking my questions. Again, nice quarter..

Thank you. Good to take to you..

Our next question is from Joseph DeNardi with Stifel. Please proceed..

Hi. Good afternoon.

Chuck, now that you all have been operating or have some better transparency into LOGCAP, could you talk about the revenue opportunity you think that exists there once you get to full run rate, even if it's within a range?.

Sure. Hi, Joe. How are you? So we've talked about this year what we're projecting. We have raised our midpoint. We were very, very pleased with the way that in the rate and pace that we were able to phase into or are phasing into, I should say, Iraq.

We feel that we have a much better understanding now on the workloads that will remain in Kuwait and the rest of the Middle East. And then as you know, we've not even begun yet to do phase-in activities on Kwajalein. So that's a bit of a long winded way of saying that we feel very confident at the spending levels against the LOGCAP contract.

And the last point that I'll make and I've made on prior calls is we are really, really pleased with the amount of activity that we see in INDOPACOM for non-Kwajalein related tasks. Those tasks are continuing to be visible, and in fact are becoming a bit more substantive from a site perspective as well..

Okay.

And then maybe just contractually, Chuck, to the extent that the United States tries to establish a bigger presence in the INDOPACOM region, what ability you would play in that process?.

Well, that will happen in a number of different ways. To the extent that that growth or that expansion would come through the LOGCAP vehicle, we offer the awardee for INDOPACOM and thus have kind of exclusive. We have sole source price for anything that is -- what is considered to be urgent and compelling, vis-à-vis the LOGCAP award.

We have been very pleased with the interaction we've had with the Navy, vis-à-vis the LOGCAP vehicle as well. And there are other emerging contracts, which is a recently released RFP for the Philippines BOS contract as well, which, given our increased scale, we should be able to play very aggressively for that award as well.

The last point is, and I can't go into a lot of detail, but you can look at the press with regard to various exercises that are occurring in the INDOPACOM area of operation now. And to the extent that those are LOGCAP supported, you can play that into our growth thoughts in INDOPACOM as well..

Okay, that's helpful. And then maybe lastly, when we get some additional clarity around the budget hopefully in a few weeks, can you just talk about kind of what you all are going to look at first when that comes out? Kind of what's most relevant for you all within the budget? Thank you..

What's always most relevant to us is our core competencies, base operations, logistics and IT modernization, particularly O&M modernization efforts. As we mentioned in our prepared remarks, the Army as an example has been very aggressive in its installation upgrade plans. We see the same thing in other clients such as NASA and DHS as well.

So the federal government across the board in my 20-plus years experience in this marketplace are really placing as much emphasis as I've ever seen to upgrading its infrastructures, upgrading its installations, upgrading its supply chain to more innovative and instrumented ways of doing business.

A lot of that is quite frankly it's cheaper to do things that way. And I would like to think that we've played a leading role in positioning for some of these newer capabilities, and these newer approaches to infrastructure installation and supply chain management..

That’s helpful. Thank you..

Thank you..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Thank you very much. And thanks to everybody for joining us on the call today. We've enjoyed the discussion and look forward to updating you next quarter. Have a good day..

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation..