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Vectrus, Inc. (NYSE:VEC) announced fourth quarter and full year 2014 performance results which included revenue of $285.8 million in the fourth quarter and $1,203.3 million in the full year, operating income of $8.1 million in the fourth quarter and $38.4 million in the full year, cash provided by operating activities $43.0 million and strong free cash flow2 of $39.1 million.
"We are reporting financial results that met our internal expectations and position us well to provide critical functions and support to our customers in challenging areas around the world," said Ken Hunzeker, chief executive officer and president of Vectrus. "With an anticipated robust pipeline of identified new business opportunities and a healthy backlog, we are optimistic about our future and our first full year as an independent company."
Fourth Quarter 2014 Results
Fourth quarter 2014 revenue of $285.8 million declined $41.3 million or 12.6 percent compared to the fourth quarter of 2013. On an adjusted basis, fourth quarter 2014 revenue2 of $285.8 million declined $30.6 million or 9.7 percent compared to the fourth quarter of 2013. We experienced an anticipated $43.0 million decline in revenue compared to the fourth quarter of 2013 for our Afghanistan programs. Programs based in Afghanistan contributed $50.7 million of revenue in the fourth quarter of 2014.
"The expected revenue reductions in Afghanistan were partially offset by a $12.4 million increase in revenue from our core business" said Hunzeker. "Although the operating environment remains challenging, we are seeing signs of stabilization and expect future growth in our (non-Afghanistan) core business during 2015."
Operating income was $8.1 million or 2.9 percent operating margin in the fourth quarter of 2014, compared to $25.2 million or 7.7 percent in the fourth quarter of 2013. On an adjusted basis, operating income2 was $8.6 million or 3.0 percent operating margin in the fourth quarter of 2014, compared to $25.8 million or 8.2 percent in 2013.
"Our adjusted operating margin2 of 3.0 percent is down 520 bps compared to the prior year, mainly due to lower service requirements on Afghanistan contracts," said Matt Klein chief financial officer at Vectrus. "Our internal operational excellence initiatives and strong performance on recent wins are expected to lead to margin improvements in the future."
Fourth quarter 2014 diluted earnings per share were $0.31 compared to $1.54 in 2013 and adjusted diluted earnings per share² were $0.33 compared to $1.58 in 2013.
Full-Year 2014 Results
Full year revenue of $1,203.3 million declined $308.4 million or 20.4 percent compared to 2013. On an adjusted basis, 2014 revenue2 of $1,172.0 million declined $302.7 million or 20.5 percent compared to the prior year. Programs based in Afghanistan declined $243.0 million for the full year, as a result of lower service level requirements and continued troop withdrawals. Programs based in Afghanistan contributed revenue of $270.1 million in 2014. Middle East programs declined $85.7 million for the full year but have recently seen revenue stability in the third and fourth quarter of 2014. The decrease in revenue in fiscal 2014 compared to fiscal 2013 was partially offset by increased activity in U.S. based programs plus a full year of revenue on the Navy FSET program, which began at the end of 2013. Our recent contract wins are expected to add approximately $150.0 million of revenue in 2015, mitigating the previously disclosed and anticipated declines associated with Afghanistan.
Operating income was $38.4 million, or 3.2 percent operating margin for the full year 2014, compared to $131.3 million or 8.7 percent in 2013. On an adjusted basis, operating income2 was $50.0 million or 4.3 percent operating margin for the full year 2014, compared to $129.1 million or 8.8 percent in 2013 due to lower service requirements on Afghanistan contracts and lower revenue on Middle East programs.
Full year 2014 diluted earnings per share were $2.13 compared to $8.06 in 2013 and adjusted diluted earnings per share2 were $2.80 compared to $7.92 in 2013.
The year ended December 31, 2014, cash provided by operating activities was $43.0 million, which is $49.8 million lower when compared to 2013. Free cash flow2 was $39.1 million for the full year 2014, which is $51.2 million lower when compared to the same period in 2013, primarily due to changes in business volume.
"Cash flow finished strong due to solid funding positions on contracts and a consistent focus on collections," said Klein.
For the year ending December 31, 2014, adjusted book-to-bill3 ratio was 1.1x. The Company ended the year with total backlog of $2.9 billion, which excludes the October 2014 award of the Thule Base Maintenance contract.
"For 2015 we expect revenue to be in the range of $1.1 to $1.2 billion," said Hunzeker. "Our pipeline is strong, with more than $1 billion of new business proposals submitted and pending potential award, and more than $3 billion in potential new business opportunities identified for 2015. We expect full year adjusted operating margin4 to range from 3.2 percent to 3.6 percent.”
2015 guidance details include:
Revenue $1,100M to $1,200M
Adjusted operating margin4 3.2% to 3.6%
Free cash flow5 $15M to $19M
Adjusted EPS6, diluted $1.76 to $2.23
The Company notes that forward-looking statements of future performance made in this release are based upon current expectations and are subject to factors that could cause actual results to differ materially from those suggested here, including those factors set forth in the Safe Harbor Statement below.
Management representatives will conduct an investor briefing and conference call at 8:00 a.m. Eastern time on Tuesday, March 17, 2015.
U.S.-based participants may dial in to the conference call at 888-359-3627, while international participants may dial 719-325-2420. Passcode for both is 1539968. For all other listeners, a live webcast of the briefing and conference call will be available on the Vectrus Investor Relations website at http://investors.vectrus.com.
A replay of the briefing will be posted on the Vectrus website shortly after completion of the call, and will remain available for one year. A telephonic replay will also be available through March 31, 2015 at 877-870-5176 (domestic) or 858-384-5517 (international) with passcode 1539968.
1 Free cash flow is calculated as Generally Accepted Accounting Principles in the United States of America (GAAP) net cash provided by operating activities less capital expenditures.
2 See “Key Performance Indicators and Non-GAAP Financial Measures.”
3 Adjusted book-to-bill is the amount of adjusted funded orders divided by adjusted revenue for the period.
4 See “Key Performance Indicators and Non-GAAP Financial Measures.” Full year 2015 adjusted operating margin guidance excludes the pretax impact of separation costs incurred to become a stand-alone public company in the amount of $500K.
5Full-year 2015 free cash flow guidance is GAAP net cash provided by operating activities less estimated capital expenditures of $2M.
6 See “Key Performance Indicators and Non-GAAP Financial Measures.” Full-year 2015 adjusted diluted EPS guidance reflects the impact, net of tax, of separation costs incurred to become a stand-alone public company in the amount of $320K or $.03 per share. The total number of estimated weighted average diluted common shares outstanding is 10.8M at Dec. 31, 2015.
Vectrus is a leading, global government services company with a history in the services market that dates back more than 50 years. The company provides infrastructure asset management, information technology and network communication services, and logistics and supply chain management services to U.S. government customers around the world. Vectrus is differentiated by operational excellence, superior program performance, a history of long-term customer relationships, and a strong commitment to their mission success. Vectrus is headquartered in Colorado Springs, Colo., and includes more than 5,000 employees spanning 85 locations in 15 countries. In 2014, Vectrus generated sales of $1.2 billion. For more information, visit our website at www.vectrus.com or connect with us on Facebook, Twitter, LinkedIn, and YouTube.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 (the "Act"): Certain material presented herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Act. These forward-looking statements include, but are not limited to, statements about the spin-off of Vectrus, Inc. (the "Company") from Exelis Inc. (The “Separation”), the terms and the effect of the separation, the nature and impact of such a separation, capitalization of the Company, future strategic plans and other statements that describe the Company's business strategy, outlook, objectives, plans, intentions or goals, and any discussion of guidance or future operating or financial performance. Whenever used, words such as "may", "will", "likely", "anticipate", "estimate", "expect", "project", "intend", "plan", "believe", "target", "could," "potential," "continue," or similar terminology. These statements are based on the beliefs and assumptions of the management of the company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. The company undertakes no obligation to update our forward looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: risks and uncertainties relating to the spin-off, including whether the spin-off and related transactions will result in any tax liability, the operational and financial profile of the Company or any of its businesses after giving effect to the spin-off, and the ability of the Company to operate as an independent entity; economic, political and social conditions in the countries in which we conduct our businesses; changes in U.S. or international government defense budgets; protests of new awards; our ability to submit proposals for and/or win all potential opportunities in our pipeline; changes in technology, intellectual property matters, government regulations and compliance therewith, including changes to the Department of Defense procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. Government's budget; our success in expanding our geographic footprint or broadening our customer base; our ability to realize the full amounts reflected in our backlog; impairment of goodwill; misconduct of our employees, subcontractors, agents and business partners; our ability to control costs; our level of indebtedness; subcontractor performance; economic and capital markets conditions; ability to retain and recruit qualified personnel; security breaches and other disruptions to our information technology and operations; changes in our tax provisions or exposure to additional income tax liabilities; changes in generally accepted accounting principles; and other factors described in Item 1A – “Risk Factors,” and elsewhere in our Annual Report on Form 10-K and described in our future reports filed with the Securities and Exchange Commission (SEC).
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