Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Vectrus (VEC) Q3 2019 Earnings Call Transcript

By Motley Fool Transcribing - Nov 6, 2019 at 7:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

VEC earnings call for the period ending September 30, 2019.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Vectrus ( VEC 1.10% )
Q3 2019 Earnings Call
Nov 05, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you for joining us for the Vectrus third-quarter 2019 earnings conference call and webcast. Today's call is being recorded. My name is Omar, and I'll be the operator for today's call. [Operator instructions] And now I'll pass the call over to your host, Mike Smith, vice president of investor relations and corporate development at Vectrus.

Mike Smith -- Vice President of Investor Relations and Corporate Development

Thank you. Good afternoon, everyone. Welcome to the Vectrus third-quarter 2019 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 website, 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, we will be discussing and reporting non-GAAP financials and other metrics. Which we believe provide useful information for investors but should not be considered isolation or as a substitute for performance measures prepared in accordance with GAAP.

At this time, I would like to turn the call over to Chuck Prow.

Chuck Prow -- President and Chief Executive Officer

Thank you, Mike, and good afternoon, everyone, and thank you for joining us on the call today. Please turn to Slide 3. In the third quarter, we continue to make progress on our goal to make Vectrus the premier converged infrastructure company in our market driving incremental revenue and earnings momentum. Total revenue grew 17% in the quarter, driven by strong organic revenue growth rate of 13%.

As expected, revenue growth is accelerating in the second half of the year given the continued phase in our programs won in 2018 and the programs won thus far in 2019. These wins have significantly diversified our portfolio and increased our market share with the Navy and the Air Force. In July, we acquired Advantor. Advantor, the leading provider of integrated electronic security systems that protects over 2,000 facilities and assets for defense, intelligence, Federal Civilian and international clients, including in the INDOPACOM AOR.

In the quarter, Advantor contributed to our growth adding 3% to our overall revenue growth rate. As you may recall, Advantor is the only vertically integrated and accredited command control and communications network security technology platform in the industry today. The acquisition typifies the investments we plan to make in our business to reinforce Vectrus's of position as an innovator and the emerging converged infrastructure market. Our teams have already identified and engaged in several cross-selling opportunities.

We expect Advantor continue to contribute to our financial results, as well as increase our portfolio of operational technologies that will drive in power the converged infrastructure. Our profitability improved sequentially as anticipated with adjusted EBITDA margin reaching 4.6%, up 40 basis points from the second quarter. As we indicated in our last call, while year-over-year comparisons are more than norm, we are also highlighting our sequential improvement as reflective of our evolving operating model and the recent award phased in during the second half of 2019. Excluding approximately $0.04 from M&A activities related to the acquisition of Advantor and less fees associated from the LOGCAP V pre-operational legal efforts, adjusted EPS was $0.84.

I am pleased that we were able to achieve these results despite the continued investment in our business to include LOGCAP V pre-operational activities, the implementation of new systems, standardizing processes, strengthening our supply chain and more broadly driving efficiencies through enterprise Vectrus. Our ability to effectively manage our cash position drove a substantial increase in cash from operations of $13 million for the quarter. We continue to focus on generating strong cash flow and plan to exceed a 100% of net income to cash conversion in 2019. Because of our strong cash flow and balance sheet, during the quarter, we reduced debt by $3 million year over year, even after acquiring Advantor for $44 million.

We continue to have the financial strength to support our future organic and inorganic growth strategies. We expect our growth momentum to continue with approximately $2.2 billion of bids submitted awaiting award, which includes protested contracts. Our new business pipeline includes $7.1 billion of opportunities planned over the next 12 months, which does not include any opportunities associated with Advantor. Our growth efforts are yielding greater client diversification but are also expanding our geographical presence.

For example, Vectrus was recently awarded two contracts to provide services in Africa. One award is to provide forward-deployed IT support services and the other is to provide equipment maintenance services. While small in size, we went to broaden our presence in the African AOR and demonstrate our unique ability to provide facility and base operations, supply chain and logistics services, IT mission support and engineering and digital technology services and complex operating environments. Regarding LOGCAP V, we have continued to move ahead with preparations for phase-in.

We remain confident in our position with respect to both our Seat and our task orders in the CENTCOM and INDOPACOM AOR. We expect the Court of Federal Claims to deliver their decisions on or about December 4th. At that point, we will have a clearer view of the timing with regard to receiving authorization to proceed. Our teams are prepared and ready to proceed.

Given our results to date, we remain confident in our growth expectations for 2019, which are on track to achieve the upper end of our 7% to 9% revenue growth outlook. Further, as our momentum is supported by a strong backlog and a robust pipeline of new business, we are on track to double-digit revenue growth in 2020 as our revenue diversification strategy, customized campaigns, and growth-related activities increasingly pay off in terms of market share and top-line results. Our performance continues to validate our strategy and we remain focused on driving growth and profitability and on investing in all aspects of our business to prepare for and to facilitate in accelerating growth curve over the next several years. Our goal remains to be a $2.5 billion, 7% EBITDA margin leader in the converged infrastructure market.

On September the 20, Vectrus was added to the Military Times best for vets index due to our unwavering commitment and support to U.S. military veterans and their families. Only companies that have earned a spot on the bus for vets rankings for three consecutive years, have a market capitalization of at least $200 million and meet other metrics of liquidity are eligible to be included in the index. It is indeed an honor to be included as one of the 48 companies in this index, and we are proud to consistently prioritize Vectruns and their families.

With Vectruns Day coming this Monday, November 11, I would like to take a moment to recognize all Vectruns for their service to our nation, particularly those who are part of the Vectrus team and support, many of our client's critical missions oftentimes to remote in austere environments every day. We thank you for all you do for our nation and for our company. Now, I'd like to introduce you to our new chief financial officer, Susan Lynch, who is joining us on her first Vectrus quarterly call. Susan is a seasoned financial executive with a strong track record in the government services, technology, defense, and manufacturing industries.

Susan's deep experience, financial acumen and focus on both performance and cost control align well with our mission and financial objectives. We are thrilled to have Susan as our CFO and to execute our strategy. Susan welcome to the Vectrus team.

Susan Lynch -- Senior Vice President and Chief Financial Officer

Thanks, Chuck, and good afternoon, everyone. It's a pleasure to join the Vectrus team, I have been here nearly three months and have gotten to know the management and finance team and I'm delighted to be working at a company that supports our military at home and overseas, as well as our allies. I believe the company has a tremendous growth opportunity and the necessary capacity to achieve its revenue and profitability objectives. I look forward to meeting with you, our shareholders and analysts over the coming quarters.

Turn with me now to Slide 4 to discuss our third-quarter results. Third-quarter 2019, revenue was $359.9 million, up $51.8 million or 17% year on year. Organic revenue growth was up 13% year on year, excluding the contribution from Advantor or which was acquired on July 8th. Total revenue growth resulted from increases of $22.9 million from our U.S.

programs of which $10.2 million was from the acquisition of Advantor and an increase of $20.5 million from our Middle East programs and an increase of $8.4 million from our European programs. Our K-BOSSS contract contributed $127 million to revenue or 35% of total revenue in the third quarter. Our growth-related activities, targeted campaigns, and diversification strategy continue to contribute increasingly to our revenue. During the third quarter, we grew revenue with the Navy by 56% year on year and increase our Air Force revenue by 35% year-on-year.

Our expansion within our intelligence and other federal clients increased 26% year on year. Revenue was up sequentially $28.3 million or 9% with 3% from the acquisition of Advantor. Operating income for the third quarter of 2019 was $14.4 million or 4% margin, compared to 4.5% in the third quarter of 2018. Operating income increased $0.4 million year on year due to an increase in revenue, partially offset by an increase in SG&A tied to internal investment in global operations, Advantor G&A and approximately $600,000 associated with Advantor M&A and LOGCAP V pre-operational legal cost.

The operating margin adding back of $600,000 was 4.2%. Please note that the operating income and margin in the prior year included a one-time $1.4 million benefit associated with the successful closure of an unresolved item on a closed contract. This had a positive 50-basis-point impact on our operating margin in the third quarter of 2018. Operating income was up $3.2 million sequentially or 28%, this was in line with our expectation for sequential improvements that were discussed last quarter.

Third-quarter 2019 interest expense was $1.9 million, up $600,000 year on year and on a sequential basis, reflecting the financing of the Advantor acquisition and short-term working capital requirements. EBITDA for the third quarter of 2019 was $16.1 million or a 4.5% margin, compared to 4.8% margin in the third quarter of 2018. EBITDA margin decreased year on year due to the previously mentioned one-time $1.4 million benefit in the third quarter of 2018, which added 50 basis points. EBITDA increased $1.1 million or 8% year on year.

Adjusted EBITDA margins, which adds back as previously discussed M&A and LOGCAP V legal expenses was 4.6% as compared to 4.8% last year. Adjusted EBITDA margin improved 40 basis points from Q2 '19 which is in line with our expectations for sequential improvement. Net income for the third quarter of 2018 was $9.4 million as compared to $9.9 million in the prior year. The effective tax rate in the third quarter increased to 24.8% from 22% primarily due to changes in the geographical mix of income.

Adjusted net income was $9.8 million flat to prior year. Diluted earnings per share for the third quarter of 2019 with $0.80, compared to $0.86 in the prior year. Adjusted EPS was $0.84 excluding the previously mentioned adjustments and was up 40% on a sequential basis. It is important to note that the company's effective tax rate in the third quarter had a $0.03 negative impact on adjusted diluted EPS.

Turn with me now to Slide 5, to discuss cash and liquidity. Net cash generated from operating activities in the first nine months of 2019 was $28.4 million, up $20 million year on year. Net cash generated in the third quarter was $13 million, an improvement of $8.5 million year on year. Having been here for three months.

I fully appreciate that our ability to generate strong cash flow is an important characteristic of our business. We continue to expect to generate over 100% cash conversion, compared to net income in 2019. And I see pockets of opportunity to improve our cash flow profile. In July, the company acquired Advantor systems for $44 million using cash on hand and drive from its revolver.

Total debt at the end of the quarter was $73 million, down from $76 million in the third quarter of 2018. The company's leverage ratio was 1.04 times and well below our covenant level of 3.0 times. Cash quarter end was approximately $41 million for net debt of approximately $32 million. At quarter end, our revolver was undrawn with $112 million of available borrowing capacity with the possibility to expand borrowings by an additional $100 million subject to lender consent.

Well, our balance sheet continues to be strong we are evaluating opportunities to take advantage of current market conditions and our financial strength to expand our credit facility to support future working capital needs and lower the company's interest expense. Turn now to Slide 6 to discuss backlog. Third-quarter 2019 total backlog was $3 billion and includes backlog associated with Advantor of $62 million. Funded backlog of $807 million was up 4% year-on-year and decreased 14% sequentially due to the timing of awards.

Because our order flow fluctuates significantly from quarter to quarter, particularly in the second and third quarters of each year a trailing 12-months view a book to bill is a better representation of our business. The company's trailing 12-month book to bill was 1.0 times. As a reminder, our book to bill does not reflect contracts under protest and in particular, LOGCAP V. Total backlog includes both funded and unfunded backlog and represents firm orders and potential options.

Our contracts are multi-year contracts and the right to exercise an option, is at the sole discretion of the U.S. government or the prime contractor when we are a subcontractor. Total backlog excludes potential orders under indefinite delivery and indefinite quantity contracts and new contract awards that are under protest. If we include programs under protest.

Our pro forma total backlog would rise significantly and will be approximately $4.4 billion. Let's move now to Slide 7, to discuss our guidance. Given the year to date and current performance we are seeing on our programs, we remain confident in our 2019, estimates, and as such are reaffirming our full-year guidance. For 2019 we continue to expect revenue in the range of $1.37 billion to $1.39 billion, reflecting 7% to 9% growth year over year.

With the momentum we are seeing in our business, we now believe that revenue for the full year could be toward the high end of our guidance. We continue to expect EBITDA margin in the range of 4% to 4.2%. Our guidance for adjusted EBITDA margin, which excludes M&A and LOGCAP V pre-operational legal costs remains at 4.3% to 4.5% the midpoint of our adjusted EBITDA margin is 4.4%, which would equate to 20 basis points of improvement as compared to 2018. As mentioned last quarter, we focused on deploying the incremental profitability from our higher revenue volume in 2019 to build capabilities and prepare for our substantial growth.

We have continued to invest in our business, and we're pleased with the sequential margin improvement we achieved in the third quarter despite these investments. Looking to the fourth quarter we are working to deliver a margin that is above the third-quarter level, while continuing the investments that will further enhance our capability and foundation to support the significant volume of growth in 2020 and beyond. Our estimate for interest expense remains at $6.0 million, depreciation and amortization is now anticipated to be $6.5 million, down from $7.1 million. We now estimate a 23.2% tax rate for the year, up from 22% due primarily to geographic mix.

For the fourth quarter of 2019, we are forecasting a 24.5% tax rate due to the provisional tax rate drew up for 2018. Diluted earnings per share guidance remained in the range of $2.82 to $3.05. We continue to expect adjusted diluted EPS in the range of $3.06 to $3.49. Weighted average diluted shares outstanding are estimated at 11.6 million shares.

Our 2019, net cash provided by operating activities guidance is unchanged at $38 million to $42 million and incorporates our increased internal investments. Operational capital expenditures guidance is approximately $10 million including our application modernization project of $4 million, with the remainder coming from program requirements. As a reminder, program-related capital expenditure is considered in contract pricing and will be recouped all or in part of the performance of the contract. Finally, 2019 mandatory debt payments are $4.5 million.

I'll turn the call back over to Chuck now. Thank you.

Chuck Prow -- President and Chief Executive Officer

Thank you, Susan. Let's move to Slide 8 to discuss our organic growth. This table shows our quarterly update of contract wins in the year. To date in 2019, Vectrus had won over $2.3 billion in awards to our commitment to delivering exceptional program performance to our clients.

Our targeted campaigns and our significant investments in growth focus talent and capabilities. As you know we have placed significant emphasis on the Air Force campaign, which grew by 35% in the third quarter and remains highly effective. We continue to leverage our global rapid response and contingency capabilities to secure new business under the Air Force Contract Augmentation Program Four or Aircraft Four program. As a reminder, back to for the water to position on this $5 billion IDIQ contract for the first time in its history in June of 2015.

We are one of eight company selected for our position on this contract. And since that time have executed a growth campaign that has resulted in Vectrus winning the greatest number of task orders issued to date under this contract. With aggregate over $136 million in total value, we look forward to continuing to grow our Air Force footprint, while expanding our campaign efforts in other clients such as the Navy and the Department of State. Regarding the Navy, Vectrus was recently awarded a small, but important $6 million task order to provide CONUS-based support services under the U.S.

Navy's global contingency service multiple award contract. Additionally, during the quarter we were awarded a small subcontract to provide engineering for the U.S. Navy's real-time spectrum operation software application. This award was based on our decade of experience and providing engineering solutions associated with electromagnetic spectrum operations.

We continue to expand our presence with the Navy in all of our core capability areas. We are seeing increased momentum in our IT Services business, which is driven in part by our focus on executing our IDIQ portfolio and leveraging our ability to provide complex, mission critical, IT services, and austere and challenging environments. To date, we have won our first task order that the prime contractor on both the Army's ITES-3S and RS3 IDIQs. Vectrus also recently awarded a subcontract to provide cyber operations for the Air National Guard which built on our recent subcontract to provide a defensive cyber operation on all Army networks in the INDOPACOM AOR.

These awards leverage our past historical performance on our next block of contract and capabilities that include operating the largest overseas Army cyber center. Please turn to Slide 9. Our 2019 award activity has been solid, and our pipeline of new business opportunities supports, continued growth in backlog and revenue. We currently have approximately $2.2 billion in bids submitted for new business waiting award, which includes protested contracts.

This is the highest dollar amount of bids, we have had under consideration since reporting on this metric. Additionally, we have had -- we have opportunities of over $7.1 billion that we plan to bid over the next 12 months. Our growth focus activities have driven solid win rates to date. And we are confident in our ability to successfully compete for business and our more than $9.3 billion new business pipeline.

Now let's move to Slide 10 the touch briefly on LOGCAP V. As you are aware, Vectrus was awarded a position on the LOGCAP V contract, the army $82 billion 10-year multiple award IDIQ contract in the second quarter. We want CENTCOM and INDOPACOM AOR task orders, which carried an initial value of approximately $1.4 billion or 40% of the $3.5 billion total initial value of task orders awarded to all seats. The protest process has moved along and we expect the Court of Federal Claims decision on or about December 4.

Our teams are prepared and ready for Faison once the protest is settled. We remain very confident in our CENTCOM incumbency. INDOPACOM will significantly expand our footprint in the vast region and we look forward to delivering excellent service to our client in this AOR. Aside from the size of these task orders alone, LOGCAP V offer incremental growth potential by giving access to all additional non-urgent and compelling opportunities and all demands for the contracts 10-year duration.

And we see significant additional opportunity for growth beyond our current order task. We continue to expect, assuming the protest has decided in early December that revenue resulting from these task orders would begin sometime in 2020 given the complexity and probable timing for program transitions associated with these awards. We are awaiting the protest conclusion and are eager to proceed. Let's move to Slide 11, to review our tracking toward our five-year revenue and EBITDA margin goal.

To reiterate, there are three components of our long-term margin expansion plan to 7% EBITDA. Volume and contract mix enterprise Vectrus in client mix and solutions. This is our scorecard of the strategic levers that correspond to each component. While we do not expect to see the levers move each and every quarter, we continue to track and measure ourselves against our objectives and report how we are progressing.

This first I mentioned volume and contract mix seeks to drive 80 basis points of margin improvement over the next four years by driving operating leverage through revenue growth and working with our clients toward more advantageous contracting structures to include fixed price and as a service models. In the third quarter, our fixed price contract increased slightly to 24%. We continue to believe the dollar value will increase further over time as fixed-price contracts grow and we reap the higher margins that this contract type can generate over time. In 2019, we have been aggressively reinvesting in our business to further solidify the margin advancement pointed of our goal in order to maximize our profitability as we move up a significant revenue growth curve heading into 2020 and beyond.

The second dimension enterprise Vectrus and to deliver another 80 basis points of margin expansion through increased process discipline, cost efficiency, supply chain leverage and technology enhancements in both our programs and support functions. Again, our Faison foundational construct for new contract flows to enterprise Vectrus which is receiving significantly heightened attention this year, we are making progress on our priorities, delivery excellence, evolving our global talent chain, establishing supply chain in the core competency, completing the implementation of our IT modernization platform and speeding the pace of technology insertion and do our current program base and our stand-alone offerings. As I mentioned last quarter, we are assessing enterprise Vectrus qualitatively this year, but we'll aim to begin disclosing a quantitative assessment in 2020. The third dimension of our margin expansion plan solutions and client mix targets and expansion of contribution of 130 basis points.

The growth of our Air Force and Navy business, the recent State Department IDIQ win and the acquisition of Advantor are all examples of our diversification strategy and action. As we execute our growth strategies and further institutionalize our planned disciplines, we may adjust our component targets to reflect what we achieve and what we learn and we will continue to update you on our progress every quarter. Vectrus had a tremendous opportunity to deliver higher profitability and returns as we grow. Let's move to Slide 12, and close with our near-term priorities and execution.

In summary, our results this year reflect consistent execution of our defined growth strategies in three core elements, enhance the foundation, expand the portfolio, and add more value. To capture our opportunity to transform Vectrus into a larger scale, higher value differentiated platform. For the remainder of 2019, we remain entirely focused on our two key priorities. First, driving further momentum through growth activities that support our recompete win rate, prosecuting campaigns to those diversify our client base and expand with existing clients and utilizing our strong balance sheet to expand our service portfolio capabilities.

Second, through enterprise, Vectrus drive process improvement improve efficiency then institutionalized repeatable performance to generate consistent exceptional client outcomes and expand margin over time. Again, this discipline is particularly crucial now as we prepare to maximize profitability on an accelerating growth. Our objective is to transform Vectrus and give a higher value differentiated business leading the converged infrastructure market. We will rely on the commitment and determination of all of our Vectrus employees, who deliver client service emission excellence every day many under austere conditions.

I thank all of our Vectrus of people in the field for their diligence to duty, and we support together. We are completing a terrific year for Vectrus and are making great strides in driving toward a five-year goal of $2.5 billion in revenue and 7% EBITDA margin. Now I'd like to turn the call open to questions.

Questions & Answers:


[Operator instructions]. Our first question is from Joe Gomes, Noble Capital. Please proceed with your question.

Joe Gomes -- Noble Capital Markets -- Analyst

Thank you. Good afternoon, and nice quarter. I was wondering if you could drill down a little deeper provide some more color on these African contracts that you recently won in the quarter. Any additional detail would be appreciated.

Chuck Prow -- President and Chief Executive Officer

I mean that we're really excited about the expansion of the geographic footprint. One of the contracts was for the Navy and the other for the Air Force, One in Djibouti and the other in Nigeria. So again, they are not large in scale, but as you know from our conversations over the last couple of years, our objective is to continue to expand our footprint, particularly in kind of emerging in environments where we really can differentiate ourselves.

Joe Gomes -- Noble Capital Markets -- Analyst

OK. Great. Thank you for that. And can you provide any update on that deck recomplete? I'm not sure where we stand on that right now.

I think last time you were talking, but there might be Award in November.

Chuck Prow -- President and Chief Executive Officer

Yes. That is still the current plan, although we're not going to be surprised to see that pushed to the right. A bit is submitted and we're awaiting the client's decision.

Joe Gomes -- Noble Capital Markets -- Analyst

OK. Great. Thanks, guys. Appreciate it.


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

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Hey, good evening. Nice results. Chuck, there seem to be some mixed data points over the past several months or mixed messages may be in terms of deployment levels, troop levels in the Middle East. I'm wondering if you could just talk about what you're seeing from your business there and what effect any of those changes have had.


Chuck Prow -- President and Chief Executive Officer

Thank you. We see continuing op tempo throughout the places that we're deploying, predominantly in the Middle East and Southwest Asia in particular. We are seeing, we'll call it stable revenues from our perspective. And as you know from our discussions is that from an up-tempo perspective, it's the same type of logic whether true for deploying in a whether true for deploying out.

So the short answer to your question is the up-tempo was high. Our teams are working very hard to support the up-tempo. But we're not seeing any new opportunities, if you will, that are specific to the new that the recent couple of months.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

OK. And then when you look into next year, you've reiterated the expectation for double-digit growth. It would seem like a primary driver of that will be the ramp-up on LOGCAP. So can you just talk about the kind of expectations for the remainder of their portfolio? I mean the trailing 12 months book to bill one times realize that excludes LOGCAP, can you maybe help us understand why a book to bill below 1.2 times should support growth in kind of the remaining portfolio.

Thank you.

Chuck Prow -- President and Chief Executive Officer

A couple of points. As you know our signings or sales in our business is quite cyclical. We are at least one time, not lockout, notwithstanding on a trailing 12-month basis. As we've talked, and we prefer to look at book to bill on a trailing 12-month basis.

I would point to two things in terms of my confidence in our continued growth outside of LOGCAP. One is our very strong pipeline, it's the largest pipeline that we've had since I've been at Vectrus 21 and 22, our win rates remain very strong. So I really like the momentum that our growth team under Sue Deagle have and in quite frankly, our ability to more effectively than ever phase in new opportunities from a profitability perspective.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Thanks. I'll get back in the queue. Thank you.


Our next question is from Chris Van Horn, B. Riley FBR. Please proceed with your question.

Chris Van Horn -- B. Riley FBR -- Analyst

Good afternoon, and thank you for taking my call. I wanted to ask about the SG&A, it seems like in the third quarter you became a little bit more efficient in terms of percent of sales relative to the first half. And I just wanted to -- just curious how we should think about that going forward. And I think you also mentioned additional investments.

Are you thinking more of the SG&A side or is there something more on the COG side where you've been seeing the investments?

Chuck Prow -- President and Chief Executive Officer

In our SG&A -- in our business is really quite closely aligned operating leverage, so as our revenue continues to trend in a positive direction which we foresee for this -- which we see for the foreseeable future, we are going to make a very tactical and strategic decision both on how we reinvest that operating leverage. So from our perspective, it's all about how do we make sure we return the necessary amount of profit, more growth to meet our 7% commitment while continuing to invest strategically in our business.

Chris Van Horn -- B. Riley FBR -- Analyst

OK. Got it. And then I know you mentioned that you've got these key levers to achieve your 7% adjusted EBITDA margin and it looks like customer mix is a component of that, how do you see that mix evolving? It looks like Navy has increased a little bit, whereas Air Force has increased a lot relative to 2016. How do you see those two customers kind of evolving over the next year or two years?

Chuck Prow -- President and Chief Executive Officer

We have in the pipeline that we have discussed earlier, we really like the mix of clients we have within that pipeline. We can have this conversation without kind of continuing to reexpress how good the SENTEL acquisition has been for us. Now of two years ago, we continue to grow our intelligence community footprint as well, and I would hope that's going to give a size and scale here in the coming quarters that will begin to break that out individually as well. So there are different clients in our market, those different clients have different profit profiles and they also favor different contracting types.

We continue to see, although I will tell you that LOGCAP will -- it's a cost-type contract and so that's going to continue to be the predominant contracting type that we deal with, but other clients are moving aggressively into both fixed price and as a service types of contract vehicles, which give us a bit more control of our margin profile.

Chris Van Horn -- B. Riley FBR -- Analyst

Got it. Thank you so much for the time, and congrats on the quarter.


[Operator instructions] Our next question is from Joseph DeNardi, Stifel. Please proceed with your question.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Yes, thanks. Chuck, just kind of maybe focusing on the margin target, longer term, it seems like given out successful you guys or on LOGCAP that could make it harder to get there. So if we look at it as kind of the goal of $2.5 billion in sales in 7% margins equates to about $175 million in EBITDA, is your thinking that the LOGCAP win makes it easier to get there, maybe sales are a little higher and margins are a little lower, but you still can't get to the EBITDA target or I think about it the wrong way. I mean can you get there early?

Chuck Prow -- President and Chief Executive Officer

I think that -- what you mean your point would be a logical conclusion. Although I will say that that amount of volume and the increasing size and scale of our supply chain to support LOGCAP we have a lot of levers, we can pull. So at this point in time, I would not be prepared doing the lease come off 7% margin objective. Although we're going to have to pull different types of levers, I think under a cost type contracting scenario.

Does that help?

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

OK. Yes, that does. I mean, does the pipeline itself, as you see it now support 7% margins in terms of customer mix and contract type or do you need that to kind of continue to shift further in your favor?

Chuck Prow -- President and Chief Executive Officer

I will tell you, I said the answer to the prior question, I am very, very pleased with the diversity in our pipeline. And within that pipeline, the diversity of contract types. We spend a lot of time pre-positioning with our clients in terms of the benefits to them of moving the fixed price type contracting and increasingly to as a service contracting. And the last point I'll make on that is with the Advantor acquisition and our continued move to harden our solution sets, we are seeing increased -- we are seeing very attractive margin profiles on our solution business.

So we're going to continue to focus on solutions and as a service type offerings to help us drive to the 7%.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

OK. And then Susan, you mentioned maybe there being an opportunity to lower interest expense, a little bit more if you could talk about that in a little bit more detail. And then just more broadly, kind of just given kind of your current experience thus far at Vectrus where you see kind of the more attractive opportunities. Thank you.

Susan Lynch -- Senior Vice President and Chief Financial Officer

All right. Thanks for the question. So we have a great balance sheet the current credit agreement was negotiated in 2014. We made some changes to it in 2017, I think there is an opportunity to make some further changes to it.

The interest rate market right now is advantageous to do an amendment and so we're taking a look at that to see what is possible -- we're a much different Company today than what we were even in 2017. And so I just want to make sure that we align our credit facility to the growth that we're experiencing and the goals we have for the corporation to grow to $2.5 billion in sales and a 7% margin business by 2023. In terms of my experience so far, Vectrus has been very, very positive. It's a great group of people that are highly knowledgeable.

I think Chuck has hired a great team around him that are highly capable. I think there is opportunity to reduce the unbilled and to take -- get the balance sheet to actually work for us and give us some actually liquidity without borrowing it. I think we have processes that need to be automated and standardized, so that there is less friction and less touchpoints in the preparation of EACs in the forecast, etc. And all of that is coming from my Honeywell days we have operational efficiency, Six Sigma, and continuous improvement.

But that's kind of my focus and what I enjoy doing. And so I hope that answers your question.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Yes. It's very helpful. Thank you.


This concludes the question-and-answer session, and I will now turn the floor back over to Chuck Prow for closing remarks.

Chuck Prow -- President and Chief Executive Officer

Thank you very much. We enjoy the call today and we look forward to updating you further on the fourth quarter and the full year in February. Thank you.


[Operator signoff]

Duration: 44 minutes

Call participants:

Mike Smith -- Vice President of Investor Relations and Corporate Development

Chuck Prow -- President and Chief Executive Officer

Susan Lynch -- Senior Vice President and Chief Financial Officer

Joe Gomes -- Noble Capital Markets -- Analyst

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Chris Van Horn -- B. Riley FBR -- Analyst

More VEC analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vectrus, Inc. Stock Quote
Vectrus, Inc.
$42.41 (1.10%) $0.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.