Business context and reporting period
This is Vectrus, Inc.’s unaudited Form 10-Q for the quarter ended June 28, 2019, with comparisons to June 29, 2018; the filing does not identify the registrant as V2X. Vectrus operated as one segment, providing facilities, logistics, IT and network communications services to U.S. government customers worldwide. All first-half revenue was from government customers.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $331.6 million | $321.1 million | $657.5 million | $641.6 million |
| Operating income / margin | $11.2 million / 3.4% | $13.0 million / 4.0% | $21.6 million / 3.3% | $21.7 million / 3.4% |
| Net income | $7.6 million | $9.2 million | $14.7 million | $15.3 million |
| Diluted EPS | $0.66 | $0.81 | $1.28 | $1.35 |
| Operating cash flow | Not presented for quarter alone | $15.5 million | $4.2 million |
Cost of revenue was 90.6% of revenue in Q2 and 90.7% in the first half, versus 90.9% and 91.3% in the comparable 2018 periods. SG&A was $19.8 million in Q2 and $39.8 million in the first half, up 23.5% and 17.4%, respectively.
- At June 28, 2019, cash was $70.3 million, including $15.8 million held by foreign subsidiaries. Current assets were $328.5 million and current liabilities were $245.8 million.
- Total debt was approximately $71.8 million: $5.5 million short-term and $66.3 million long-term, net. No revolver borrowings were outstanding at quarter-end; availability was $111.9 million after letters of credit. The company reported compliance with debt covenants.
- First-half investing cash outflow was $11.7 million, primarily capital expenditures and intangible purchases. Cash increased $4.2 million during the period.
- Backlog was $3.2 billion at June 28, up from $3.0 billion at year-end; funded backlog was $934 million. Separately reported remaining performance obligations were $1.16 billion, with about 47% expected to be recognized in 2019 and 53% in 2020.
Material changes versus prior comparable periods
- Q2 revenue rose 3.3%, but operating income fell 13.9% and net income fell 17.2%. First-half revenue rose 2.5%, while operating income was nearly flat and net income declined 3.9%.
- Q2 revenue growth came from Europe and the Middle East, partly offset by lower U.S. revenue. First-half growth also came from the Middle East and Europe, while U.S. revenue declined.
- Higher SG&A—primarily M&A costs, stock-based compensation and legal fees—pressured earnings. Net interest expense also increased, which management attributed partly to greater revolver use during the periods for working capital.
- Operating cash flow improved from $4.2 million to $15.5 million year over year for the first half, mainly reflecting less adverse working-capital movement than in 2018. Investing outflow was lower than 2018, which included the SENTEL acquisition.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said cash, operating cash flow and revolver access were expected to fund anticipated costs, capital expenditures and debt payments for at least the next 12 months.
- Vectrus received LOGCAP V task orders in April 2019, but protests were filed and the company said it could not predict their timing or outcome. The existing K-BOSSS contract, its largest, was exercised through March 2020 with a six-month option; it was recompeted under LOGCAP V. OMDAC-SWACA was exercised through November 2019, with options through February 2020.
- On July 8, 2019, after quarter-end, Vectrus acquired Advantor for $44 million in cash, subject to customary adjustments, funded with cash and credit-facility capacity. The filing does not provide post-acquisition financial results.
- Government budget and funding changes, contract competition and termination rights, contract protests, audit adjustments, and dependence on major U.S. Army programs are key risks. The Army represented about 69% of first-half revenue, down from 74% in 2018; K-BOSSS contributed 36.6% of first-half 2019 revenue.
- The company accrued $11.3 million for legal proceedings and government-contract claims, versus $7.8 million at year-end, but said it did not expect the matters to materially adversely affect results, cash flow or financial condition. It reported a June 2019 government decision concerning Former Parent costs for 2007–2010 and said it believed it was fully indemnified.
- Adoption of the new lease standard added $18.0 million of right-of-use assets and $18.8 million of operating lease liabilities at June 28, 2019. First-half net favorable contract-estimate adjustments were $0.8 million, compared with $6.6 million in 2018.
Important facts for investors to verify
- Confirm the issuer and ticker: this filing is for Vectrus, Inc. (NYSE: VEC), notwithstanding the V2X metadata.
- Track the outcome and timing of LOGCAP V protests, task-order performance and the transition or recompete of major contracts.
- Assess whether backlog converts to funded work and revenue as expected, given options, government funding timing and termination rights.
- Monitor margins, SG&A, contract-estimate adjustments and working-capital cash conversion, including the substantial unbilled receivables balance of $190.8 million.
- Review Advantor’s final purchase adjustments, integration, financing impact and contribution to results; also monitor debt and covenant capacity after the acquisition.
- Follow resolution of government audits, claims and legal matters underlying the $11.3 million accrual.