A Solid 2Q23 Beat

Training Systems Acquisition IV

A Good Start to the Year

A $440 Million Contract from the Navy

Joe Gomes

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Industrials

Aerospace & Defense

V2X Inc.

4Q20 and Full Year 2020 Results
Fourth quarter 2020 revenue of $355.3 million was down 2.7% year-over-year, mainly due to COVID-19 pandemic related deferrals of $25.8 million. On a sequential basis, revenue was up $2.9 million, or 0.8%.
Operating income in the quarter was $13.7 million, or a 3.9% margin, compared to $15.6 million, or a 4.3% margin last year. Adjusted operating income was $15.8 million, or a 4.4% margin, compared to $16.0 million, or a 4.4% margin the the fourth quarter last year. Fourth quarter 2020 operating margin was negatively impacted by 10 basis points due to COVID-related deferrals. EBITDA for the quarter was $15.8 million, or 4.5% of revenue, compared to $17.6 million, or 4.8% of revenue in the same period last year. Adjusted EBITDA in the forth quarter was $17.9 million or 5.0% of revenue, a record high, compared to $18.0 million and 4.9%, respectively, in the year ago quarter. EBITDA margin also was negatively impacted by 10 basis points due to COVID.
Fully diluted EPS in the quarter was $1.42. Diluted EPS was favorably impacted by the recognition of a tax benefit of $0.60. Adjusted EPS for the quarter was $1.18. Both EPS numbers were negatively impacted by about $0.10 due to COVID.&nbsp;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&#8217;s revolving credit facility.
Revenue increased by $13.0 million, or 0.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in revenue was attributable mainly to increases from U.S. programs of $29.2 million (which includes $20.7 million from the 2019 acquisition of Advantor), and European programs of $17.0 million partially offset by a $33.2 million decrease in Middle East programs. The COVID-19 pandemic deferred revenue of approximately $63 million and had a 4.6% impact on revenue growth. The K-BOSSS contract contributed $475 million to revenue in 2020, down from $495 million in 2019, while the OMDAC-SWACA contract contributed $198 million in 2020, down from $216 million in 2019.
By customer, the Army accounted for 69.2% of revenue in 2020, the Air Force 21.4%, Navy 4.9%, and other customers 4.4%. In 2016, the Army represented 84% of total revenue, the Air Force 14%, and the Navy 2%, so the diversification efforts are working. And these percentages do no take into account the Zenetek and HHB acquisitions. Their $200+ million of revenue is 55% derived from the Navy, with the Air Force representing just 8% and the Army 5%.
Operating income for the year was&nbsp;$43.5 million&nbsp;or a 3.1% margin. Full-year adjusted operating income was&nbsp;$48.2 million&nbsp;or a 3.5% margin. Full-year operating margin was negatively impacted by 20 basis points due to COVID-19 pandemic-related deferrals. Most of the COVID-19 impact was high-margin work that customers delayed due to limited base access and social distancing restrictions. In 2019, Vectrus generated operating income of $49.6 million or a 3.6% margin, and adjusted operating income of $52.9 million, or a 3.8% margin.&nbsp;
Full-year 2020 EBITDA was&nbsp;$51.6 million&nbsp;or a 3.7% margin. Adjusted EBITDA for the year was&nbsp;$56.3 million&nbsp;or 4.0%. Full-year EBITDA margin was negatively impacted by 20 basis points due to COVID-19 pandemic-related deferrals. In 2019, Vectrus reported EBITDA of $56.1 million, or 4.1% of revenue, and adjusted EBITDA of $59.4 million, or 4.3% of revenue.&nbsp;
Full-year diluted EPS was&nbsp;$3.14. Diluted EPS was favorably affected by the recognition of a tax benefit in the period relating to 2018, 2019 and 2020 of&nbsp;$0.60. Adjusted diluted EPS1&nbsp;for the year was&nbsp;$3.07&nbsp;and includes a&nbsp;$0.22&nbsp;tax benefit pertaining to 2020. Excluding the $0.22 tax benefit, adjusted EPS was $2.85, exceeding the high end of guidance&nbsp; Fully diluted EPS and Adjusted diluted EPS was negatively impacted by&nbsp;$0.39&nbsp;due to COVID-19 pandemic-related deferrals.
Key Contracts Associated with DoD&#8217;s 5G Initiatives 
 
<div>Vectrus continues to make progress in expanding its portfolio capabilities in the converged infrastructure market, which has resulted in the awarding of two key contracts, in our opinion.&nbsp; 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 transshipment between shore facilities and naval units to increase the efficiency and fidelity of naval logistics operations. 
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<div>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&#8217;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.</div>
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<div>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 places Vectrus in a market where digital solutions are now being applied within traditional facility and base operations and IT services and importantly represents client&#8217;s continued migration towards converged infrastructure operations.</div>
Backlog 
 
 Vectrus ended the year with a record $5.1 billion backlog, up from $2.7 billion at the end of 2019. Backlog was enhanced by wins in the LOGCAP and OMDAC-SWACA competes. Notably, those two contracts accounted for 48% of 2020 revenue. Vectrus has now locked in those contracts for 10 and five years, respectively, with over $2.1 billion of contract value. Significantly, no other contracts represent over 10% of total revenues, minimizing re-compete risk over the next several years. Including contracts under protest, proforma backlog totaled $5.5 billion at the end of 2020. The large backlog provides revenue visibility over the next several years, in our opinion. Trailing twelve month book-to-bill rose to 2.1x at year-end, up from 0.8x in the fourth quarter of 2019, while proforma TTM book-to-bill was 2.4x.
Just as important as the record backlog, is the $11.1 billion new business pipeline, up from $7.5 billion at the end of 2016. The notable growth in the pipeline is a testament to Vectrus&#8217; capability expansion driving additional opportunity across, federal, non-federal, and international clients. This business pipeline also will benefit the Company by continuing client diversification, shifting the more advantageous contract types, and focusing on higher margin technology enabled solutions.
Cash Flow and Capital
Vectrus had record breaking cash flow and ended 2020 in a solid financial position, even after financing the recent acquisitions. Operating cash flow in 2020 hit a new high of $50.9 million, excluding the $13.2 million benefit from the CARES Act. Capex came in at $4.5 million for the year, leaving $59.6 million of free cash, again excluding any CARES Act benefits. At year-end, Vectrus had $66.9 million of cash on the balance sheet, up from $35.3 million a year ago. Outstanding debt was $179.0 million, up from $70.5 million a year ago, reflecting the drawn down of credit facilities to pay for the Zenetek and HHB acquisitions. Year-end leverage ratio was 2.05x, compared to 0.97x at the end of 2019, but was well below the 3.5x max under the debt covenants. With the recent increase in the credit line, Vectrus ended 2020 with over $220 million of liquidity.
Updated Projections 
 
 2021 projections will remain impacted by COVID impacts, especially base and other restrictions, which have impacted the transition of the CENTCOM and INDOPACOM AORs to Vectrus under LOGCAP V. In fact, management does not to have INDOPACOM fully transitioned over into 2022. Netted out, there&#8217;s about a $120 million to $160 million of potential COVID headwinds in 2021. On the positive side, results will benefit from some organic growth as well as the $200+ million of revenue from Zenetek and HBB. As has become the norm recently, we also would expect the back half of the year to be stronger than the first half. For the first quarter, we are projecting revenue of $400 million, up 13.7% from the $351.7 million in the first quarter of 2020, with the increase driven by the acquisitions. First quarter 2021 EPS is projected at $0.89, up from adjusted EPS of $0.75 in the year ago period, while first quarter EBITDA is projected at $19.3 million, up from $14.6 million in the same period in 2020. For the full year, we are projecting revenue to grow 21.3% to $1,692 million, with the acquisitions the main driver. Full year EPS is estimated at $3.89 versus $3.14, while EBITDA is projected at $82.0 million, up from $56.3 million in 2020.

V2X Inc. (VVX)

Solid 4Q20 and FY2020 Even in Face of COVID

Fundamental Analysis:

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A Solid 2Q23 Beat (VVX)

Training Systems Acquisition IV (VVX)

A Good Start to the Year (VVX)

A $440 Million Contract from the Navy (VVX)

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