V2X, Inc. (identified in the filing as Vectrus, Inc.) — Form 10-Q Summary
Reporting period: Quarter ended July 1, 2016; comparisons are with the quarter ended June 26, 2015. Six-month comparisons are for the periods ended on those dates. The filing is for Vectrus, Inc.; the supplied company label, V2X, Inc., does not match the registrant name shown in the filing.
Business context and financial results
Vectrus provides infrastructure asset management, logistics and supply-chain management, and IT and network communication services, primarily to the U.S. government. All first-half 2016 revenue came from government customers; the U.S. Army generated 84.3% of revenue. Its four largest contracts represented 70.0% of first-half revenue.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $307.9 million | $309.5 million | $618.6 million | $570.4 million |
| Operating income | $11.3 million | $10.8 million | $23.1 million | $20.2 million |
| Operating margin | 3.7% | 3.5% | 3.7% | 3.5% |
| Net income | $6.1 million | $6.0 million | $12.6 million | $11.0 million |
| Diluted EPS | $0.55 | $0.56 | $1.16 | $1.02 |
First-half operating cash flow was $19.3 million, versus cash used of $0.2 million a year earlier. Investing activities used $0.1 million and financing activities used $9.4 million; cash increased by $10.0 million to $50.0 million.
At July 1, 2016, total assets were $460.5 million and shareholders’ equity was $103.6 million. The company had $105.0 million outstanding on its term loan, no revolver borrowings, and $61.2 million of revolver availability after letters of credit. The balance sheet reported $20.0 million of short-term debt and $83.0 million of long-term debt, net. The company was in compliance with its debt covenants: leverage ratio 2.01x versus a 3.25x maximum, and interest coverage 7.86x versus a 4.50x minimum.
Current-period backlog was $2.332 billion, down $80.0 million from year-end 2015: funded backlog rose to $975 million from $685 million, while unfunded backlog fell to $1.357 billion from $1.727 billion. Funded orders received in the first half were $908.9 million.
Material changes versus prior periods
- Second-quarter revenue declined 0.5%, as lower Afghanistan and U.S./European program revenue more than offset growth in the Middle East. For the first half, revenue increased 8.4%, led by $85.0 million of Middle East growth.
- Operating income increased 4.2% in Q2 and 14.4% in the first half; margins improved to 3.7% from 3.5%. First-half earnings also benefited from $3.0 million of net favorable cumulative contract-estimate adjustments, compared with $0.1 million of net unfavorable adjustments in the prior-year period.
- Q2 net income was nearly flat year over year; diluted EPS decreased to $0.55 from $0.56. First-half net income rose 15.1% and diluted EPS rose to $1.16 from $1.02.
- Interest expense increased $0.3 million in Q2, partly due to costs of an April 2016 credit-agreement amendment. First-half effective tax rate was 37.0%, compared with 36.0%; management said it did not view the increase as a future trend.
- Receivables fell to $177.7 million from $210.6 million at year-end, and days sales outstanding decreased to 52 days from 68. Management cautioned it did not expect DSO to remain at 52 days and anticipated low-60s levels as business grows and contracts start up.
Outlook, risks and notable items
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, expected operating cash flow and revolver availability should fund anticipated needs and current debt repayments for at least the next 12 months. It intended to make an additional $6.0 million voluntary term-loan prepayment over the following 12 months; no regular dividend was planned.
- The company received a $329 million modification extending its Kuwait K-BOSSS contract through December 28, 2016, improving funded backlog and 2016 revenue visibility. Management expected the recompete award in the second half of 2016.
- The LOGCAP contract in Afghanistan ended in June 2016, with phase-out work expected to be completed in Q3. Afghanistan revenue and U.S. funding for the region had declined; further reductions in U.S. presence could affect results.
- The approximately $411 million Thule Base Maintenance award was reinstated after a June 2016 appeals-court decision reversed a lower-court ruling that had set it aside. Two protestors subsequently sought rehearing, so the award remained subject to litigation developments.
- Management cited government budget and procurement changes, competition, contract protests, performance and cost-estimation risk, audits and possible cost adjustments, and contract cancellations or funding changes. The business is highly concentrated in U.S. government and Army contracts. The filing reported instability in Turkey but no then-current economic impact and said personnel were accounted for; Brexit had no reported economic impact at that time.
- Government-contract audit matters included $2.3 million accrued for open audit years. Management did not expect pending legal matters, individually or in aggregate, to materially adversely affect the company. No goodwill impairment was recorded in the first half.
- Interest-rate exposure is material because debt bears variable rates: a one-percentage-point change on the term loan would change annual cash interest expense by approximately $1.1 million. The company had interest-rate swaps with $54.8 million notional value.
Important facts for investors to verify
- Confirm the registrant identity: this filing names Vectrus, Inc., not V2X, Inc.
- Track K-BOSSS recompete timing and outcome, Thule protest proceedings, and the transition after LOGCAP’s expiration.
- Assess whether funded backlog converts to revenue and whether the decline in unfunded backlog signals reduced future work; backlog may be affected by funding and cancellation decisions.
- Monitor program and customer concentration, especially U.S. Army and Afghanistan exposure, as well as contract-estimate adjustments and operating margins.
- Verify receivable collections and DSO trends, cash generation, scheduled and voluntary debt repayments, and covenant headroom.