COMPANY OUTLOOK

Vectrus awaits further clarity on LOGCAP V transition amid COVID-19 travel halt

One protest hurdle cleared after another for the Army to proceed on the next iteration of its main global logistics contract vehicle, but then the coronavirus pandemic largely froze travel and hence much of society.

The Defense Department’s own restrictions on travel has held back some activities for the Army’s transition to the new LOGCAP V contract, Vectrus CEO Chuck Prow said Tuesday during its first quarter earnings call with investors.

Vectrus, KBR, Fluor Corp. and a PAE-Parsons Corp. joint venture all received a notice to proceed in March regarding phase-in activities and transitioning to the potential 15-year, $82 billion Logistics Civil Augmentation Program V contract.

DOD has in the meantime “issued a conditions-based transition plan that sets key conditions, under which LOGCAP V awardees may travel for site assessments,” Prow told analysts. “Some physical site visits are necessary to transition, particularly Kwajalein Atoll in the Marshall Islands, and some activity will wait until conditions are satisfied. We expect to have a better understanding of transition timelines in the next 45 to 60 days.”

The notice to go forward followed a series of February rulings by a Court of Federal Claims judge to deny protests by three out of four disappointed bidders, one left off the vehicle entirely and two that thought they should have won bigger slices. The window for those three companies to appeal has passed.

A fourth protest still remains from DynCorp International, a LOGCAP IV incumbent seeking at least a second shot to stay on the lucrative program that once represented at least one-fifth of annual revenue. The Court of Federal Claims judge overseeing that case denied DynCorp’s request in early March for a temporary restraining order on the new contract.

But apparently Judge Loren A. Smith has not had much time to return to the matter since telephonic oral arguments took place on April 13, according to the case docket.

“The judge assigned to the case has been required to focus on other non-protest related activities and so as soon as he can get back to his docket, we would assume that protest would proceed,” Prow told analysts. “I do believe that we are in the end stages of the process.”

We have reached out to DynCorp for comment on their case and will update this post if and when we hear back.

Colorado Springs-based Vectrus is holding to its financial guidance for this year even with an anticipated second quarter revenue impact from COVID-19 of $20 million-to-$25 million and what it called “a corresponding impact on operating income.”

The company still sees $1.475 billion-to-$1.525 billion in revenue this year, which indicates 7-to-10 percent growth from last year, on a 4.6 percent-to-4.8 percent adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization).

Underpinning that is a $4.1 billion backlog with roughly one-fourth of that funded and a trailing book-to-bill ratio of 1.5, which shows the company is growing its inventory of contracts faster than drawdowns to book sales.

First quarter sales climbed 8 percent from the prior year period to $351.7 million, while adjusted EBITDA rose 14 percent to $14.6 million. Vectrus estimated that COVID-19 disruptions caused a $2.2 million revenue hit in the first quarter.

Just like other companies, two factors appear to be at play for Vectrus at once: some functional hiccups in being able to perform the contracted work, but customer demand for it still running.

“At this point in time that reduction in revenue is predominantly related to base access,” Prow said. “The workload is continuing to grow and we fully expect once we get back to a more normal crewing on our particular contracts, that we’re going to work with our clients to claw as much of that workload back as possible, because it is existing demand. That demand is currently funded and the work is still required.”

Agencies are apparently running at a normal pace too in terms of procurement activity.

“We continue to see strong demand in the marketplace. Our clients are continuing to issue proposals. We continue to respond and we are continuing to receive our fair share of awards,” Prow said.

Vectrus also sounds like it is not entirely halting potential acquisitions in a COVID-19 landscape (other government services companies have), but has the current market-wide environment in mind.

“As opportunities arise that we believe are going to create economic value for Vectrus, we’re always assessing those opportunities and when the right things are presented to us, we move,” Prow said.

“Obviously we have a different backdrop and we understand that backdrop. But we remain very focused on the execution of our strategy.”

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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