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V2X, Inc. (VVX)

Q3 2015 Earnings Call· Thu, Nov 5, 2015

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Transcript

Operator

Operator

Good day, everyone and welcome to the Vectrus Incorporated Third Quarter 2015 Earnings Conference Call. Today’s call is being recorded. For opening remarks and introductions, I’ll turn the conference over to Mike Smith. Mike, please go ahead.

Mike Smith

Management

Thank you, Debbie. Good morning, everyone. Welcome to the Vectrus third quarter earnings conference call. Joining us today are Ken Hunzeker, Chief Executive Officer and President; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides from today’s presentation are available on our Investor Relations website at 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 statement in our press release 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’ll 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 reconciliation and other disclosures in our earnings release and in our presentation slides, which are publicly available on the Vectrus website at investors.vectrus.com. At this time, I would like to turn the call over to Ken Hunzeker.

Ken Hunzeker

Management

Thank you, Mike. Good morning, everyone and thank you for joining us on the call today. We are excited to be here to discuss our third quarter results. Please turn to slide 3.Before we get started, I would like to point out that Vectrus completed its full year as a publicly traded pure-play government service company. There was a tremendous amount of effort put into this achievement and like to thank all of our employees for their contributions. Turning to results. I'm pleased to announce that the third quarter, our core business revenue, which excludes Afghanistan continue to grow and increased 17% year-over-year to $260 million. This is a second consecutive quarter of year-over-year core business growth. Our Army Corps of Engineers Information Technology contract reached full operational capability in the third quarter and helped drive core business growth. Total revenue was $299 million in the third quarter, up 4% year-over-year on an adjusted basis. Contracts based in Afghanistan contributed $39 million in revenue. Our adjusted operating margin in the third quarter was a solid 3.9%, highest we've seen in over a year. Our steadfast commitment to operational excellence is bearing fruit as is demonstrated in our improved operating margin. Overall, we are continuing to execute and make progress towards realizing our 4% to 5% normalized operating margin goal. Adjusted EPS was $0.65 per share in the third quarter, up 10% from the prior year. We generated $10 million of free cash flow in the quarter and made a voluntary debt payment of $3 million. The strength of our free cash flow has enabled us to make over $9 million in voluntary debt payments year-to-date. During the third quarter, we’ve recorded a favorable settlement on uncertain tax positions associated with our former parent. Please turn to slide 4. We’ve had…

Matt Klein

Management

Thank you, Ken. Good morning, everyone. Please turn to slide 5. Today, I will be discussing our results for three and nine months period ended September 25, 2015. The table of the top of pages 5 and 6 reflect the generally accepted accounting principles financial results of Vectrus. The table at the bottom of page 5 and 6 reflects adjusted financial results to exclude the Tethered Aerostat Radar System program and separation costs to become a standalone company, and one-time favorable settlements of tax liabilities. The TARS program was retained by our former parent as part of the spin and separation costs and favorable tax settlements are a non-recurring part of the business. I will address the financial results on an adjusted basis, which we believe better reflect the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP. I'd like to turn your attention to the table shown on the lower half of slide 5, which reflects the adjusted financial results for the third quarter of 2015. Before I proceed, I would like to explain the adjustments we made to the 2015 financial results. In the third quarter, two uncertain tax liabilities were effectively settled with the IRS, which had impacts to G&A and a tax provision account. These transactions are non-recurring and non-cash in nature and as such we have made adjustments to our results to better describe the underlying results of the quarter. Please refer to the appendix in this presentation or the 10-Q for further detail. Funded orders were $444 million. Orders were $259 million compared to the third quarter of 2014 but up from $332 million in the second quarter of 2015. Revenue for the quarter was $299 million, $11 million higher when compared to…

Operator

Operator

Thank you. [Operator Instructions] And we’ll go to Corey Allen with B&T [ph].

Unidentified Analyst

Analyst

Hey, guys. Good morning. Thank you for taking my question. I just wanted to ask about the modification in Turkey and Spain, what’s the expiration of that, I didn’t catch that.

Matt Klein

Management

So, the $12 million that’s received this quarter and it expires March of 2016.

Unidentified Analyst

Analyst

Okay. And if there is a need from the customer for ongoing work, would you expect that to be awarded in another modification?

Ken Hunzeker

Management

Absolutely. Based upon the dynamic situation that’s taking place on the ground, we communicated with the customer already to adapt any modifications they would need and that would be for a future work based upon what’s taking place on the ground.

Unidentified Analyst

Analyst

Okay. And just on the Afghanistan business, as you look forward into 2016, you said you’d expect margins to come down, given the volume of work there. Could you give us the margin profile of the existing business as it stands today?

Matt Klein

Management

Sure. So Afghanistan, we positioned at the beginning this year about 7%. If you go back a couple of quarters, first quarter, we were around 6%, the second quarter, we were a little bit stronger at 7% and that was because the site visibility was consistent and we can control our cost in that period. This quarter, we came down to about 5%, because we’re seeing some changes on the ground that’s causing a little bit of stress on the program. I would expect the full year to be a little bit different than what we guided to and probably more like 6% as we finish out the year. On a positive note, we’re seeing some favorability on the remaining programs and non-Afghanistan programs that will make up the difference. So I’m not concerned about hitting our overall margin target as a matter of fact, because we’re very comfortable with where we’re right now, we raised our guidance.

Unidentified Analyst

Analyst

All right, great. Thank you for taking my questions.

Ken Hunzeker

Management

Thanks, Corey.

Operator

Operator

[Operator Instructions] We’ll go next to Morey Marcus with Sidoti.

Morey Marcus

Analyst

Sorry, I was on mute. Thanks for taking my call. My question is just on the IT side, just given the timing of the hiring of Chico, can you just talk about like what you guys are seeing in that environment from the DoD and the government. Just is it better visibility on RFPs and the award environment. I’m just kind of curious on that side because you talked about on the RFP side, it’s still kind of unclear.

Ken Hunzeker

Management

Well, I’d say Morey, what’s really interesting is that we really have a strong foundation when you look across our infrastructure and logistic services lines, where we have talked about opportunity is really on the IT network space. What we’re really focusing on is over the next year, 18 to 24 months, there is multiple IDIQ vehicles that we’re going after that are on our pipeline, which we have not been on in the past, and there are several single award contracts with our new capabilities, our abilities to execute in this area and our past performance that we really see is potential growth. So that’s why the focus, that’s why the hire of Chico. Additionally, we’ve supplemented our IT service line with more business development and operations personnel to accommodate what we think will be the new work going forward.

Matt Klein

Management

And I would say that we also view this as an area that we can increase our margins, not massively, but it would help kind of get us up to the 4% to 5% that we think this business is sustaining longer-term.

Matt Klein

Management

Okay. Yeah. Okay, that’s the only question I have. Thanks.

Ken Hunzeker

Management

Thanks, Morey.

Operator

Operator

With no other questions at this time, I’ll turn the conference back to Ken Hunzeker for closing remarks.

Ken Hunzeker

Management

Before we conclude the call, I’d like to take a minute to recognize our veterans. On Wednesday November 11th, we’ll pause for a moment to remember the dedication and sacrifices made by those men and women that served in armed forces. We did our last earnings call as a publicly traded company on Veterans Day last year, our first earnings and during that call, I told you that not only are we proud to serve side by side with the men and women who were or who have the worn the uniform, but that it is also important to recognize and thank them for their service on this day. These men and women have endured hardship and separation from loved ones in the name of liberty and freedom. So as we close, I’d like to kindly ask each of you to personally seek out veteran on your travels next Wednesday. And for all those veterans that are on this call, let me personally and on behalf of the global workforce at Vectrus, thank you for your service. We thank you for your interest and look forward to updating you on our progress next quarter.

Operator

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.